Manufacturing stages a record-beating recovery

A remarkable resurgence by British manufacturing industry is reported today by the Engineering Employers' Federation (EEF).

Having endured the worst slump in three-quarters of a century, the EEF says the UK's industrial recovery "continues apace", with exports providing "an important boost". Investment appears to be picking up faster than in previous upswings.

Growth in permanent new jobs resulting from the revival will be limited, with agency staff and extra overtime taking the strain until a more confident outlook returns. The EEF also warns: "As fiscal consolidation really gets under way in the UK and others follow suit, together with the weaker outlook for the US and risks to the sustainability of Asia's growth path, the recovery could yet falter." The organisation says British manufacturers are continuing to report buoyant trading conditions on the back of rising demand in overseas markets, which points to "good prospects for growth in 2010".

The survey, conducted for the EEF by the accountancy firm BDO, reveals that the recovery which began at the end of last year has been sustained with output and order balances reaching record levels for the second quarter in succession. Over the past three months, output and new order balances – the number of companies reporting growth compared with those reporting a contraction – were plus 33 per cent and plus 35 per cent respectively – the best records since the survey began in 1995.

The bullish news will relieve some of the pressure on the Bank of England's Monetary Policy Committee, when it meets later this week, to expand its programme of "quantitative easing" – the direct injection of money into the economy to stimulate growth and avoid deflation.

Even so, the Bank will be conscious that manufacturing comprises only about 12 per cent of the economy. The MPC will also be aware that other surveys of industrial sentiment, notably those by the Chartered Institute for Purchasing and Supply, paint a much more downbeat picture, as they do for the services sector, which accounts for 70 per cent of the UK's gross domestic product.

The EEF says its brighter outlook is driven largely by Britain's export markets, which recorded a net balance in output and new orders of +30 per cent. Europe, in particular, is turning out to be stronger than expected, despite the recent sovereign debt crises. The depreciation of the pound by about 25 per cent since 2007 appears to be feeding through to output at last. Greater confidence across the sector is also translating into recruitment, although this is being driven by temporary or agency working.

Uncertainty about future demand had been dampening investment plans but a number of sectors are now set to increase investment. Lee Hopley, the chief economist at the EEF, said: "We have to maintain perspective that the recovery is coming from a very low base and the risks to the economy in the medium term have not gone away.

"The rebound in exports and modest improvement in investment will need to become much more firmly entrenched if we are to see a much-needed rebalancing of the economy."

One helpful factor that has been fading in recent months is the patience shown by HM Revenue and Customs towards late payment of tax, under its "Time to Pay" policy.

Manufacturing businesses have been hit hardest by an overall reduction in new "Time to Pay" arrangements in the past year, suffering a 73 per cent collapse in the value of arrangements agreed under the scheme, according to Syscap, an independent finance provider.

The EEF predicts the UK economy will grow by 1.5 per cent in 2010 and by 2.1 per cent in 2011.