Short-term trends are bleak: the weak eurozone is adversely affecting manufacturing via export demand whilst smaller businesses are being held back by lack of credit. Banks are under pressure from regulators and the public sector is struggling under its austerity programme. Consumers face poor labour market conditions while construction remains mired by lack of activity.
2012q1 data showed that the pace of decline in UK manufacturing seen in 2012 finally slowed. Preliminary estimates of activity show that output in the sector contracted by 0.3% in the first quarter of this year, less than the previous quarter’s 1.4% fall, but clearly exporters are struggling to make much headway in the sluggish eurozone market. We anticipate that significantly reduced demand both on the domestic and international fronts will continue to weigh heavily on the sector’s near-term prospects. Recent data shows that while business investment in manufacturing picked up by 0.3% in 2012q4, it was 3% down on the year. We expect output to stay broadly flat in 2013 and then strengthen to about 2% in 2014.
Construction was the main drag on GDP growth in 2013q1, with output falling by a whopping 2.5% in the quarter. Short-term prospects prospects remain poor as public sector cuts affect the public housing, education and repair & maintenance sectors. Although the government has announced some infrastructure works to boost the sector’s growth as well as the new Help to Buy scheme, we do not expect any meaningful contribution to growth from these sources to come for at least two years. Infrastructure projects will take some lead time before their impact is felt in the real economy and the Help to Buy scheme will only have an effect once the extra demand created pushes up price high enough to stimulate additional house building. That will take some time to happen. Tellingly, business investment in the sector declined by a whopping 19% q-on-q in the 2012q4. We expect output to fall by just under 4% in 2013. The sector will finally post growth of 1.1% in 2014.
Consumer services saw some cautious growth in 2013q1. Although consumer confidence has improved marginally from six months ago, consumers still face difficult labour market conditions. The latest ONS labour market statistics confirm that job numbers are now finally on the decline in line with weak output trends. The unemployment rate is high and exceptionally weak wage growth is easily outpaced by inflation that is expected to remain above target for some time. Notably, business investment in hotels & restaurants is exceptionally low, dropping by almost 40% over the course of 2012 to its weakest level in over 3 years. We expect the sector to post only modest growth of under 1% this year and 2% in 2014.
Financial and business services saw muted growth of 0.2% in 2013q1 as output in finance & insurance stayed stagnant while professional services saw a better performance. Despite various government schemes to encourage banks to lend to firms, of which Funding for Lending is the most prominent, so far these have been unsuccessful in encouraging the flow of credit towards businesses. The financial sector has its role to play in prolonging this stalement. The government has poured money into the economy via its quantitative easing programme hoping to boost lending but this has gone towards plugging the gaps in banks’ own balance sheets. We expect increased regulation to add to the pressure on banks, dampening lending even further. Other measures such as the forced separation of retail and investment banking means that banks will not be able to access deposits and funds from the retail side either. Our view is for financial services to show no growth in 2013 and then for output to pick up by 1.8% in 2014. Business services will see better growth: of 2.5% in 2013 and a further 2% in 2014.
The public sector’s woes continue. Planned spending cuts will mean more headcount losses in the public sector for unprotected departments than currently forecast. There also remain question marks over the government’s ability to deliver on its spending cuts. We expect a prolonged period of pain and consolidation in the public sector with austerity likely to extend beyond 2018.