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Weak growth in UK manufacturing poses Bank of England dilemma

Britain’s manufacturers expect 2015 to be their worst year for growth since 2009 and next year will be little better, according to a survey which highlights the dilemma that the Bank of England faces as it considers whether to raise interest rates.

A survey by the EEF, the manufacturers’ association, found that only car companies and chemicals firms remained buoyant while the rest of the manufacturing sector warned it expected output and employment to stagnate.

Firms blamed a slowdown in China and a lack of orders from continental Europe for the 0.1% contraction in 2015 after they registered the fourth consecutive quarter of slowing growth.

The industry expects growth to return in 2016, though the outlook is weak and growth is only forecast at 0.8%.

The weak state of manufacturing output, which remains below pre-crash levels, will pose a dilemma for Bank of England rate-setters who meet this week amid concerns that higher rates will encourage an influx of funds to the UK, pushing up the value of the pound.

Sterling has already risen by 7% this year against a basket of currencies and by almost 20% against the euro, hitting exports and making imports cheaper. Recent figures have shown a surge in imports as foreign firms find their products sell more cheaply in the UK.

A further rise in the value of sterling will only make it more difficult for UK firms to sell abroad and make them reliant on domestic consumer demand for sales growth.

Mark Carney, Bank of England governor, has been warningfor many months that interest rates will start to rise off their record low of 0.5% but has hinted that the weakening outlook for global growth would delay a rate rise until late next year.

His view was supported by the newest member of the monetary policy committee, Gertjan Vlieghe, who said the tightening effect of the strong pound on UK monetary policy was “huge”.

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In contrast, the US Federal Reserve is preparing the path for a tightening of monetary policy after its chair, Janet Yellen, indicated to Congress last week that policymakers are likely to vote to raise US interest rates at the next policy meeting on 15-16 December.

The central bankers’ bank – the Bank for International Settlements – said on Sunday that an “uneasy calm” prevails in financial markets about the first increase in US interest rates in almost a decade.

The EEF said its survey showed manufacturing growth would not help to boost UK growth. Lee Hopley, EEF chief economist, said: “The prospect of manufacturing contributing to growth in the UK economy this year has all but faded away with another disappointing set of indicators from our survey.

“The downbeat mood may not be universal across all industry sectors, but it certainly seems to be spreading as the challenges have mounted through this year – from the collapse in the oil price, slower world trade growth and weaker than expected construction activity,” she said.

The fall in oil prices from more than $110 a barrel to below $45 a barrel over the last 18 months triggered a collapse in output in the North Sea oil industry. Layoffs in Aberdeen and oil rig maintenance firms have hurt the Scottish economy and the exchequers’ expected tax receipts.

Howard Archer, chief economist at IHS Global Insight, said: “The manufacturing sector has had a pretty torrid 2015 as it has been particularly hampered by the strong pound and lacklustre global growth hitting export orders.

“However, there have been some recent signs that the sector may be returning to modest growth after output contracted through the first three quarters of 2015,” he added.

Official figures for the manufacturing sector due on Tuesday are forecast to show modest growth in November, mostly due to resilient domestic demand.

However, firms reported slowing orders from UK clients going into 2016 after the EEF’s UK orders balance, which offsets the number of firms reporting a rise against those that report a fall, recorded another negative quarter and confidence about UK economic outlook in next 12 months took a knock.

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The output balance fell in the last quarter to -12%, its lowest level since the third quarter of 2009, and the order book balance fell by 19%. Hopley said: “While the chancellor’s recent spending review will have been seen as supportive to industry, it is critical that the government continues to act to ensure the UK is a competitive location for manufacturing.”

The Department for Business said: “The difficult conditions in the global economy affecting manufacturers and others makes it more important than ever that we stick to our long-term economic plan for sustainable growth.”


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