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UK Economy
Eurozone woes hit UK manufacturing output
From the Financial Times of Wed, 10 Dec 2014 00:01:57 GMT
British Chambers of Commerce director-general John Longworth©Bloomberg

British Chambers of Commerce director-general John Longworth

Britain’s manufacturers have suffered a drop in output as they grapple with economic malaise in their big export markets in the eurozone.

The manufacturing slowdown does not appear to have dented the economy’s overall growth rate but it is another setback to hopes that the UK could “rebalance” away from its reliance on services and domestic demand. The National Institute of Economic and Social Research (Niesr) think-tank forecast on Tuesday that the economy grew 0.7 per cent in the three months to the end of October, the same pace as the previous month.

That suggests the UK is still on track to grow 3 per cent over the year, faster than any other rich industrialised country.

Most economists expect the pace of growth to slow to about 2.5 per cent next year, partly because of the weakness in the eurozone, the UK’s biggest trading partner.

Official data show total industrial production fell 0.1 per cent between September and October, driven by an unexpected 0.7 per cent drop in manufacturing output.

Manufacturing output was still 1.7 per cent higher than a year ago and economists warned that the monthly data could be volatile. But manufacturers are having an increasingly hard time as the eurozone’s problems sap demand for their exports.

Output fell in eight of the 14 manufacturing subsectors with the biggest drop in computers and electrical products. The EEF trade association said the electronics sector’s large exposure to the German market had “taken its toll on production”.

The British Chambers of Commerce, which had been more optimistic than most forecasters, will on Wednesday cut its predictions for UK economic growth from 3.2 per cent to 3 per cent for 2014; from 2.8 per cent to 2.6 per cent for 2015; and from 2.5 per cent to 2.4 per cent for 2016.

John Longworth, the BCC’s director-general, said the downgrades were “a warning sign that we still face a number of hurdles to securing a balanced and sustainable recovery”.

He said business confidence had been affected by a risk of eurozone deflation, slowing growth in emerging markets and political uncertainty in Ukraine and the Middle East.

“With UK exports broadly flat, it is crucial to reassess the UK’s overall export growth strategy and the support available to existing and potential exporters,” he said.

Niesr also said the weakness in the eurozone posed a risk to the economy. But it noted that falls in oil prices meant UK growth could be stronger than expected.

Paul Hollingsworth, an economist at consultants Capital Economics, agreed with that point. He said the sharp drop in oil prices from about $110 a barrel in the summer to $66 should “provide a timely fillip to growth”.

“Granted, UK manufacturers have been compelled to pass on any cost savings to consumers recently, so they are unlikely to be able to rebuild their margins. But lower prices should still help to boost demand for their products,” he said.

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