Manufacturing can compensate for public-sector cuts, says EEF

Growth strategy should focus on helping more large companies to thrive and expand

Britain's manufacturers are confident they will be able to fill the "growth gap" as the public sector contracts. The Engineering Employers Federation (EEF) says its members – 6,000 industrial companies of all sizes – are "well placed" to respond to the Prime Minister's call to "create and innovate; invest and grow".

Having endured the worst downturn in three-quarters of a century, British industry has benefited from a 25 per cent depreciation of sterling since its peaks in 2007, and most surveys of business confidence and export orders reflect a mood of optimism. This will hearten those in the Treasury and the Bank of England most worried about the "rebalancing" of the economy away from consumption and towards investment and exports.

However, the EEF says that British industry would " benefit from a government strategy which helps to overcome the growth barriers that companies face and to grow the next generation of large global players". Its latest Report, The Shape of British Industry, comes ahead of the Government's forthcoming White Paper on boosting economic growth.

The EEF says that the "sophisticated, successful sector" is growing at the fastest rate since 1994. Its chief executive, Terry Scuoler, commented: "Whilst the current attention on young businesses and start-ups is helpful, we must not ignore the wider benefits to the economy that larger companies bring. The UK doesn't just need a handful of larger companies over the next decade; we need hundreds of them with the scale and muscle to tackle our economic challenges. Otherwise we risk placing a speed limit on our growth potential." The EEF points out that Germany has more than twice as many manufacturers with 250 or fewer employees as the UK does. This has long been regarded as a competitive weakness.

The proportion of companies with more than 250 employees is also significantly lower in the UK than in Germany – 1.2 per cent compared with 2.1 per cent. The disparity with the USA is even greater with firms employing 500 or more people accounting for 0.6 per cent of manufacturing companies in the UK compared with 2.9 per cent in the US.

The EEF suggests measures to "catalyse growth" such as new powers for Local Enterprise Partnerships to borrow and scrapping the target for 25 per cent of public-sector contracts to go to small and medium enterprises.

However other surveys of wider business confidence betray a more mixed picture, especially given manufacturing represents only 12 per cent of the UK economy. The Institute of Chartered Accounts in England and Wales (ICAEW) reports there has been a "steady decline" in confidence among business in the past few quarters with many companies "reluctant to invest and back the recovery". Retail and Wholesale is the least confident sector.

Scott Barnes, the chief executive of Grant Thornton, added: "2011 will undoubtedly be another difficult year with forecasts softening on the back of expectations of reduced consumer spending. However businesses are still predicting that exports, turnover and profits will be higher over the next four quarters than in 2010 overall.

"Businesses are now used to dealing with difficult conditions and will continue to review their own prospects in terms of financing, order books and opportunities," he added. "There are many dynamic companies, including exporters buoyed by the relative weakness of sterling, looking to invest in their long-term futures."