Interview: Manufacturing to provide main impetus in British economic growth

by Peter Barker

LONDON, Dec. 10 (Xinhua) -- British economic growth prospects are currently bolstered by buoyant growth in manufacturing as the usually dominant services sector undergoes a period of reduced momentum, a London-based economist told Xinhua.

"We have good reason to think the manufacturing sector will continue to perform strongly given indicators from more timely surveys," Ruth Gregory, economist with Capital Economics which is an independent macroeconomic research firm in London, said in a recent interview.

"Forward looking balances of these surveys point to strong gains in manufacturing in the coming months," Gregory said.

"We have also seen surveys of employment intentions remain quite strong, suggesting manufacturing intends to take on new recruits at a fast pace and they are pretty upbeat about the outlook."

Growth in the manufacturing sector, which accounts for about 10 percent of GDP, is outstripping service sector growth for only the second time since 2007.

Official statistics showed that manufacturing output rose by 1.1 percent on the quarter in the third quarter, well above the 0.4 percent expansion in the services sector.

November's Markit/CIPS surveys showed that the manufacturing purchasing managers' index (PMI) outperformed its services counterpart for the eighth month in a row.

And figures released last week showed industrial production rose almost 4 percent in manufacturing output on a year earlier, one of the biggest increases since early 2011.

INFLATION OUTSTRIPS WAGES GROWTH

The services sector, making up about 77 percent of the economy, is the usual driver of growth, particularly in its consumer-facing sectors.

Wage growth at an annual increase of 2.2 percent is healthy but it is outstripped by inflation, currently at 3 percent, and means that consumers are just not spending as freely as they were.

This spike in inflation was fuelled in the main part by a Brexit-related adjustment in sterling's exchange rate in the immediate aftermath of the referendum vote in June 2016 which saw the pound fall from 1.48 U.S. dollars to 1.22 U.S. dollars.

That inflation spike is passing through the economy and many commentators believe it is very close to a peak, with forecasts of a downward inflationary trend in 2018.

In the meantime, with service sector growth subdued, it is the healthy growth in manufacturing which is keeping economic growth moving.

"Given the manufacturing sector accounts for only about 10 percent of the economy it would need to expand by about eight times as fast as the services sector to have the same impact on GDP growth so while the strength is encouraging it clearly can't drive solid economic growth on its own," said Gregory.

"Its unlikely to fully offset weakness in the services sector but it does seem well placed to continue to provide valuable support in the meantime," she added.

GLOBAL GROWTH TO BE A CONTINUING STIMULUS

The global economy is currently enjoying strong growth, with International Monetary Fund (IMF) figures showing growth in 2017 of 3.6 percent.

The IMF noted in its Regional Economic Outlook last month that the economic recovery in Europe, which accounts for most of Britain's trade, had gained speed.

Overall real GDP growth in Europe is projected at 2.4 percent this year, a faster rate than the IMF predicted earlier in the year, and up from 1.7 percent in 2016.

While the IMF noted in the same report that in Britain growth had slowed as households felt the squeeze of weaker sterling, the stronger performance of the manufacturing sector is balancing this.

And European and global growth will in turn continue to benefit the British manufacturing sector and its unusually strong growth into 2018.

"Net trade actually dragged on growth by 0.5 percentage points in Q3, but annual growth in export volumes is quite a punchy 10 percent annually at the moment," she said.

Surveys show this strength should continue, while imports slow in line with weak consumer spending growth, she said

"We are optimistic that net trade will provide more support to GDP growth in the quarters ahead as export growth continues to remain strong. But import growth slows from its recent quite strong rate."

The last time that manufacturing growth outstripped services growth was in 2011, and that growth was ended with the eurozone crisis.

That handicap no longer exists, and the prospects are good, said Gregory. "The global backdrop is rather more supportive than it was in 2011." Enditem