U.K. manufacturing-sector output to shrink: EEF

By MarketWatch

U.K. manufacturing output is likely to shrink in 2012 as a result of the euro zone’s flagging demand for U.K.-made goods, manufacturing organization EEF said Thursday.

EEF said in a quarterly report that it expects output in the U.K. manufacturing sector to contract 0.1% in 2012, compared with a previous forecast for a 0.5% expansion. The sector makes up about 10% of the economy’s overall output, which EEF expects will expand 0.3% this year.

EEF blamed the revision to its forecast on poor demand in the recession-hit euro zone, a key destination for U.K. exporters, and a weaker-than-expected performance by the manufacturing sector in the first quarter. Official data showed manufacturing output was flat in the three months to March, while overall the economy shrank 0.3%.

EEF spokesman Mark Swift told Dow Jones Newswires that between 55% and 60% of U.K. manufacturing sector exports head to the euro zone where activity has slowed in response to the region’s sovereign debt and banking crises.

A survey of 409 manufacturers published in the report nevertheless found a majority of firms’ order books expanded in May, continuing a recovery that has been in progress since the start of the year. Yet companies’ expectations of future orders weakened, reflecting the gloomy outlook, and profit margins remain thin, the survey found.

Employment intentions at firms quizzed also weakened, the EEF survey found, although manufacturing sector workers may take comfort from a separate survey published by payment processing firm VocaLink Thursday, which found the average annual pay increase in May in their sector was 3.9%, outpacing the 2.1% rise in service sector wages.

A separate gauge of manufacturing sector output, published last week by financial information firm Markit and the Chartered Institute of Purchasing and Supply, sank to a three-year low in May, heightening fears that the U.K. economy may shrink again in the second quarter.

Paul Champion

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