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Growth in manufacturing may not last in the longer term

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UK manufacturing is enjoying a sharp rise in output, but the trend may not be a lasting one, a new report has warned.

According to the latest Economic Prospects report from the EEF, the manufacturing employers’ group, the outlook is positive in the near future.

Manufacturing will grow by 3.8 per cent this year and 3.4 per cent in 2011, outstripping that in the economy as a whole, which is forecast to expand by 1.1 per cent in 2010 and 2.1 per cent in 2011.

However, the road further ahead looks less certain, the EEF argued in its report.

Some manufacturing firms will continue to benefit from the weakness of sterling and good trading links with such emergent markets as China and India.

Others, though, will suffer from cuts in government expenditure at home and from the predicted sluggish growth in both the US and the eurozone.

The report also identified low levels of investment as another problem for British industry, describing it as manufacturing’s “Achilles heel”.

Investment by manufacturing firms is not predicted to grow until 2011 – it will be down by 14 per cent this year – by which time it will have declined by a third on its pre-recession levels.

Lee Hopley, the EEF’s chief economist, commented: “Manufacturing has exceeded expectations so far this year with a broad-based recovery, supported by growth in world trade, a weaker pound and restocking. But, with looming spending cuts here and more uncertainty in key markets, the prospects for different sectors will diverge over the coming year.

Ms Hopley added that the road to more stable economic conditions is likely to be an uneven one and that, in seeking to rebalance the economy, the government faces a mixed outlook, especially as investment is set to remain weak for the rest of this year.

Interest rate levels could also be a telling factor in future growth figures.

Although the base rate is at a record low of 0.5 per cent, stubbornly high inflation may force an increase in the cost of borrowing at some point down the line.

Ms Hopley concluded: “Manufacturers and the wider economy also face risks and lingering uncertainty. Whilst we have more clarity over the government’s fiscal ambitions, attention is now turning to where the cuts will hit and the difficult balancing act facing the MPC and when it will make its next move.”