Oil industry freeze weighs on UK economy

Construction activity meanwhile dropped for the second month running in May

‘Aberdeen is the oil industry’ – pessimism about the future has seized the oil-dependent granite city (Getty Images)

Sliding confidence among manufacturers is threatening to drain the momentum behind the economic recovery, according to industry figures.

Weeks after the Conservatives used their handling of the economy as a key plank in a election win, the EEF manufacturers’ association believes the industry is now on far shakier ground. The sector, which accounts for around 10 per cent of the overall economy, has suffered waning orders and optimism in the past three months.

Construction activity meanwhile dropped for the second month running in May, according to the industry analyst Glenigan.

The findings come after official growth estimates for the first quarter of the year remained stuck at 0.3 per cent, with the economy set back by a soaring trade deficit and a weaker performance from the dominant services firms.

Manufacturers are feeling the brunt of an investment freeze by oil and gas producers in the wake of tumbling oil prices over the past 12 months.Overall investment spending is set to grow at the slowest pace since 2012 this year, while the EEF has pared back its forecast for overall growth this year from 2.8 per cent to 2.6 per cent.

Chief economist Lee Hopley said: “Manufacturing is still growing, just not at the pace anticipated at the beginning of the year. The sector is still in positive territory, but the ground is looking a lot less firm beneath its feet.

“Much of this weakening is down to the impact of the decline in oil and gas activity on the supply chain.

“There is a range of challenging factors at play, but the net result is that this weakening trend looks set to continue, potentially even through to the end of the year.”

Builders are also suffering an election hangover, with Glenigan’s index, which covers the value of projects starting on site during the previous three months, dropping 10 per cent as activity stalled in the run-up to polling day. Civil engineering and non-residential sank more than 20 per cent, more than offsetting the fastest growth in housebuilding projects for almost a year.

But the analyst struck a more upbeat tone than the EEF, anticipating a revival in activity later this year as the clouds of election-inspired uncertainty clear.

Economics director Allan Wilén said: “Despite the recent slowdown in project starts, our data indicates that activity will bounce back quickly over the next couple of months. The value of contracts awarded has continued to grow during 2015 and developers will now be mobilising their project teams. We expect this to come to fruition with a surge in starts during the second half of the year.”