ECONOMIC PROSPECTS 2013

EEF’s analysis of economic prospects for the year ahead

AUGUST 2013

Contents

Introduction – Review and Preview 1

UK Outlook 2

Manufacturing Outlook 6

Two things to watch 11

Economic Prospects August 2013 1

Introduction – Review and PreviewThe economy has had a rough ride over the past couple of years, defying earlier forecasts that not only would the UK be well on the way to making up the ground lost through the 2008/09 recession, but the major drivers for that growth would be net trade and investment.

The backdrop to EEF’s last edition of Economic Prospects, published in Summer 2012, was a weak end to 2011 and few signs of much better to come in the first half of 2012. With that, our forecast for growth was revised down to 0.2%. While the quarterly growth profile across the year was impacted by one-off events, National Statistics confirmed that the economy expanded only modestly.

While we pointed to strengthening consumer spending as a source of growth we had also expected to see signs of a business investment underway through 2012. Contributions to growth, however, continued to be unbalanced, with household and government expenditure accounting for most of what growth we saw last year.

The first half of 2013 has brought clear signs of economic improvement with growth picking up in the three months to June. Again, this has been largely consumer-driven.

The overall outlook for 2013 remains more positive than in recent years and growth is expected to gain a bit more momentum going into 2014. We, along with others, including the IMF, have revised up UK growth for 2013 since the start of the year. But at 1.1%, the pace of expansion is still some way off pre-crisis levels. Our central forecast points to this expansion gathering a bit of pace as the UK economy heads into 2014, when year-on-year growth is expected to come in at 1.8%.

As has been the case in previous forecasting rounds, we continue to see some risks to our central projections. Any further delays to the upturn in business investment would dent growth this year and next. However, action by government – here and in Europe – could provide a bit more support for growth in the coming years if the pace of austerity in the Eurozone periphery eases or the UK government brings forward additional investment in infrastructure.

Business surveys for manufacturing have also taken a turn for the better and with the odds of new downside risks emerging in the Eurozone having shortened considerably, uncertainty in the UK’s main market should present less of a drag on growth. Quarter-on-quarter growth across manufacturing should gain pace in the latter part of this year, although the performance of individual sectors will remain uneven and any slowdown in world trade growth would exacerbate this divergence.

Our latest forecasts are cause for some guarded optimism about the prospects for the UK economy and manufacturing. But the gap between where the economy was before the recession and where we are now remains larger than many of our competitors and the challenge of moving to a more balanced growth path is as big as it ever was.

Chart 1

Growth, but not as we expected% annual change

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Source: EEF and Oxford Economics

Economic Prospects August 2013 2

UK OutlookJuly forecasts from the IMF have bumped up expected growth in the UK economy for 2013 from 0.7% to 0.9%. This was the first upgrade the IMF has given to UK growth expectations since April 2012 and is the latest marker in generally brighter assessments of the UK’s prospects in recent months. While this was welcome news it came just three months after the IMF downgraded its expectations for the UK economy from 1.0% and is still well below the pre-recession trend growth.

Our central forecast has also strengthened with a strong second quarter helping raise growth in 2013 overall to 1.1%. Growth is then expected to steadily increase quarter-on-quarter through 2014 and 2015 with annual growth rates of 1.8% and 2.4% respectively.

The path of business investment has been dramatically altered by Blue Book revisions from ONS in July. A large downgrade showed a very large contraction in business investment in the last quarter of 2012 and means that, although business investment is forecast to grow in three out of four quarters this year, 2013 as a whole will be 9.3% down on 2012. This successive postponement of a recovery has been a feature of forecasts since 2010 and means rebalancing towards a greater reliance on investment and trade driven growth is still some way off becoming a reality. Large corporate cash balances and improving confidence in the economy suggest business investment has strong potential to recover and our baseline forecast is for this to occur with growth of 6.4% in 2014 followed by 6.9% in 2015.

The labour market has performed more strongly than expected despite a lack of income growth. While real disposable income fell back in the first quarter of 2013, employment has continued to grow since the middle of 2012, with the number of people in employment rising 16,000 in the three months to May 2013. The households saving rate fell in the first quarter of this year which may indicate a fall in precautionary savings as confidence rises.

GfK’s consumer confidence index in June 2013 reached a two-year high driven primarily by impressions of the general economy and the climate for major purchases rather than consumers’ personal financial situations. Inflation is starting to fall back after tax, utility price, and oil price increases in 2010 and 2011. Although real disposable income fell back in the first quarter, falling inflation and the impact of personal allowance changes should be felt in

stronger consumer purchasing power in the second half of 2013.

Latest export data show some recovery since the low levels seen at the start of 2013. Exports to Germany have weakened somewhat (and imports have risen) compared with 2012 but exports to China continue to grow strongly (and imports have been static) and exports to the US are also up (and imports down). Recent weakening in prospects in Asia have brought back forecasts of world trade but the UK is expected to receive a boost to growth from net trade in 2013, 2014 and 2015.

UK Forecasts% annual change unless stated

2012 2013 2014

Trading environment€/£ Exchange rate 1.23 1.17 1.18$/£ Exchange rate 1.59 1.52 1.46Exports 0.9 0.0 2.5Imports 2.8 -1.5 2.0Current account (£bn) -3.8 -3.1 -2.6OutputManufacturing -1.7 -0.7 1.9GDP 0.2 1.1 1.8Costs and pricesAverage earnings 1.2 1.5 3.0Oil price ($/barrel) 111.7 104.9 102.2EmploymentManufacturing employment (000s) 2625 2606 2585Employment (000s) 32119 32294 32449ILO unemployment rate (%) 8.0 8.0 8.2

Source: EEF and Oxford Economics

Economic Prospects August 2013 3

Eurozone eases on austerity scenario

With many Eurozone economies both in recession and struggling to deliver agreed fiscal consolidation plans, there has been increasing speculation that there may be an easing in the pace of austerity programmes. Such an easing may allow more growth (or at least less contraction) to occur in the Eurozone countries with important spill-over effects for neighbouring countries including the UK.

Economic indicators for the Eurozone have shown some improvement in recent months. The composite manufacturing PMI for the Euro area rose to its highest level in sixteen months in June, consumer confidence has stabilised and economic activity seems to have steadied. We are forecasting steady economic improvement over the next few years with the Eurozone as a whole returning to growth in 2014, expanding 0.9% in that year. Unemployment remains a concern, with the unemployment rate continuing to rise in many countries. Political and social unrest, however, clouds the picture of general economic improvement and many countries are seeing a change in the political climate towards greater uncertainty.

Chart 2

Eurozone growth returning in 2014 and 2015% annual change in GDP

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In this scenario we model the implications for UK growth and investment of the pace of austerity halving for France, Spain, Italy, Greece, Portugal and Ireland. There has been some relaxing of fiscal timeframes already and there are plausible reasons why further moderation could occur.

The French Finance Minister has been calling for the introduction of a European growth strategy to accompany austerity at the very least and this does appear to be making some headway. Germany has allowed some leeway for France to bring its deficit into line with agreed limits. Similarly, the Germans are enthusiastic about the progress austerity has delivered in Spain and the deadline for the country to bring its budget deficit into line with EU limits has been extended to 2016.

The inconclusive Italian elections and anti-austerity rhetoric of the Italian Prime Minister have increased speculation that austerity in Italy may come to a halt. However, looking past the rhetoric, the Prime Minister still insists he is committed to Italy’s fiscal targets. The most likely ‘easing’ of austerity may come in the allowance of slippage from targets or additional time to reduce the drag from fiscal policy.

In Greece, there have been four general strikes against the government’s existing austerity plans so far in 2013. While there is no sign yet that the government is planning to abandon its commitment to austerity, there has been some easing of the terms of the consolidation path with the medium-term primary balance target reduced to 4.5% of GDP rather than 6.5% and the adjustment path extended to 2016.

This scenario, where the pace of fiscal consolidation is halved in six Eurozone economies in 2013 and 2014, would have a limited impact on the UK economy in 2013 and 2014, increasing GDP by £1.7 billion above our baseline forecast in those two years. In the longer term, however, we would expect to see a much bigger impact on the UK economy as growth in Eurozone countries would feed through into higher economic activity, raising demand for UK exports to these countries, boosting investment and leading to higher economic growth.

Economic Prospects August 2013 4

What if investment doesn’t pick up?

While the recovery in output has not lived up to earlier forecasts, the shortfall in investment growth since the end of the 2008/09 recession has been much more significant. Since 2010, a range of forecasters, including the Office for Budget Responsibility and indeed EEF, have believed an investment recovery to be just around the corner. And with that, the process of rebalancing the economy towards more trade and investment would get underway.

In contrast to the OBR’s 2010 expectations that business investment would be more or less back to pre-recession levels this year, it is still a third below that. Rather than the profile of robust recovery, we have instead seen investment levels stabilise between the end of 2010 and beginning of 2012, before contracting once again over the year to 2013q1.

Our central forecast is for business investment to post another contraction in 2013, although, this is driven mainly by large falls in investment in the second half of 2012 and the first quarter of 2013. The second quarter of 2013 should see this trend reverse with quarter-on-quarter increases through the rest of this year and picking up through 2014 and 2015 as output continues to recover and confidence improves. In these latter years the rate of growth should reach 6.4% and 6.9% respectively.

Confidence, finance and judgements on where to invest to capture the best return on investment have all been factors in the disappointing investment performance thus far. Our central forecast assumes that companies will see a more benign global environment, with some stabilisation in Europe and a continuing, albeit more subdued, growth outlook in emerging markets.

In addition, companies holding on to large cash surpluses combined with easier credit conditions should support a stronger appetite to invest and therefore a larger contribution to growth from business investment compared with recent years.

We do, however, see continuing downside risks to this forecast. In a weaker recovery in investment scenario, businesses with cash surpluses elect to invest outside the UK in the search for high returns in faster growing markets and in response to domestic policy uncertainty – particularly around

the UK’s relationship with Europe. In addition, small companies, having become disengaged with external finance providers, adjust their investment decisions to match internal funds available.

In this weaker investment recovery scenario, investment growth would be flat for the rest of this year leading to an overall decline of 11.0% in 2013. A more modest quarterly growth profile in the remaining forecast period leaves business investment growing at just 2.1% and 3.4% in 2014 and 2015.

However, given the sustained period of weakness in this component of growth a worst case scenario of on-going contractions in investment this year, with a return to growth pushed out to 2014, cannot be ruled out. In this instance we might not see any meaningful growth in business investment until 2015.

Clearly each of these scenarios will impact on our GDP outlook. In the weak recovery scenario growth is pulled down to 1.5% in 2014 and 2.0% in 2015. If the recovery is pushed out for another year, as in our worst case scenario, growth comes in at 1.4% next year and a touch stronger at 2.1% in 2015.

Chart 3

Risk that business investment recovery could still be delayedContributions of business investment to growth, % annual change in GDP

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Source: EEF and Oxford Economics

Economic Prospects August 2013 5

Government loosens fiscal policy scenario

Economic growth looks set to continue in the years ahead but likely at a rate that is much lower than the pre-recession trend. The magnitude of risks to growth seem to have eased somewhat in the first half of 2013 but they have not disappeared. The government may see a case for more intervention between now and the election to counteract the risks that remain.

Earlier this year, much debate was had around the role of fiscal policy and whether the fiscal strategy was being sufficiently supportive of a recovery. The government’s current fiscal policy, which was set out in Budget 2010, has focused on returning to a sustainable fiscal position.

Since then, however, the government’s spending and reprioritisation decisions combined with underperforming growth has led to the recovery in the government’s books being delayed in successive forecasting rounds. As a result, the fiscal deficit has been more sustained than expected and net debt will continue to rise until 2017/18.

The strategy of consolidation that we have seen to date has had significant implications for economic growth. An assessment of consolidation efforts between 2010 and 2012 suggests they have reduced the level of GDP by around 3.4% compared with what would have happened with no fiscal consolidation (Source: Oxford Economics). And under the plans set out in Budget 2013, consolidation efforts will continue to drag on growth throughout the next few years.

The IMF’s review of the UK economy in May concluded that, while commitment to the current plan leant credibility to their approach, the government should balance reducing debt with promoting growth. Their recommendations included bringing forward capital investment as a way of stimulating growth in the economy.

The Autumn Statement is the last chance for the government to act before the election. Increasing infrastructure spending is one of the more effective ways in which the government can stimulate growth, with the least distortionary impact and deadweight loss. Any change in the government’s investment plans would, however, depend on project

readiness and the ability of the government and industry to deliver projects on an earlier timeframe.

This scenario looks at the impact of the government bringing forward £15 billion of infrastructure investment in 2014 and 2015. As shown in chart 4, this would lead to a substantial jump in GDP as this additional investment stimulates higher industrial output, private investment and employment.

Chart 4

Government investment could offset a fall in business investmentGDP, £ billions

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Source: EEF and Oxford Economics

Stimulus of this amount would not be ground breaking and would not turn growth prospects in the UK economy around. While it would have corresponding impacts on public finances it would neither counter the need for further austerity, nor would it substantially change the path back to a sustainable fiscal position. However, if visible signs of recovery and rebalancing remain elusive, if growth forecasts continue to be pushed out, stimulus by way of more government investment could go some way to counteract the effects of a potential fall in business investment.

Economic Prospects August 2013 6

Manufacturing outlookThe events of the past few years have heavily impacted the UK manufacturing sector. Emerging from the recession in 2009, the sector showed early signs of a decent recovery until mid-2011 before being thrown off track by both international and domestic events at that time.

The manufacturing sector re-entered recession in the fourth quarter of 2011 and contracted in three out of four quarters in 2012. Internationally, the Eurozone crisis and subsequent contraction in the wider European Union, the UKs largest single export market, saw a fall in goods exports to EU countries. Domestically, falling investment, a struggling construction sector, and a series of one-off events such as the Jubilee and poor weather all contributed to weakness in the manufacturing sector. UK manufacturing contracted 1.7% in 2012.

Despite the depressed overall picture of the past 18 months, there are signs of strength and reasons to expect the manufacturing sector to once again start recovering. Manufacturing is very diverse and there has been significant variation in how manufacturing subsectors performed both during and after the recession. In 2012, six out of 14 manufacturing sectors grew while the rest contracted offsetting this growth. The next section provides a short overview of the leaders and laggards of the manufacturing sector.

Other indicators and measures provide some additional reasons to expect the sector to pick up in the next 18 months. Total goods exports have continued to grow since the end of the recession. Exports to non-EU markets have been a particular strength in the past four years, growing 45% since 2009 overtaking the value of our exports to the EU for the first time. The weakening in emerging markets is expected to hold export growth flat in 2013 before returning to growth in 2014.

Manufacturers are also taking on people and continue to plan investments for the year ahead. Manufacturing employment grew 3.4% in 2012, the first time jobs in the industry have increased since the late 1990s. At the same time, EEF’s Business Trends Survey shows that a positive balance of manufacturers continue to plan to increase investment in the year. While these intentions have not materialised into a pick-up in actual investment, they suggest that manufacturers are ready to increase investment should economic conditions provide the certainty they need.

This time last year we were forecasting UK manufacturing to grow 2.1% in 2013 but, following the events of last year, we have substantially revised our forecast. We now expect output in the sector to be down 0.7% in 2013, a contraction largely the result of weakness at the end of 2012. On a quarterly basis, however, we are expecting the sector to grow at a moderate pace for the rest of 2013 and on into 2014. Manufacturing will return to positive annual growth of 1.9% in 2014.

Chart 5

The outlook for manufacturing looks brighterManufacturing output, £ billion

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Economic Prospects August 2013 7

Manufacturing sector leaders and laggards

Manufacturing is a very diverse sector with wide variation in the performance of sectors both during and after the 2008/09 recession. This section looks at the characteristics and performance of the Leaders and Laggards of manufacturing – sectors which have experienced either a very strong or poor recovery since the end of the recession. We also discuss two sectors that we expect to see doing well in the next few years – the Emerging Leaders.

Chart 6

Significant variation across the manufacturing sectorIndex of Manufacturing, 2009q4=100

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Source: EEF and Oxford EconomicsLeaders

Other transport

Other transport has been one of the most consistently strong UK manufacturing sectors, having grown throughout the recession, largely as a result of the long-term orders that characterise the sector. Civil aviation continues to grow strongly as new, more fuel-efficient aircraft come on stream and existing backlogs of orders are filled. Growing demand from the Middle East offers strong opportunities for future growth in this sector.

Defence output, on the other hand, did weather the storm of the recession, as companies continued to fill previous government orders, but has since been badly hit by government cuts. The US budget sequester, which led to a $42.7bn defence budget cut in 2013 alone, is likely to hit growth throughout the supply chain for several years.

Positively, manufacturers in this sector are highly innovative and many have used the slowdown in defence spending to diversify into new sectors such as security, which are growing quickly. Brazil is a particularly promising growth market for security ahead of the football World Cup and the Olympics.

Overall, we expect the sector to continue to grow as demand from civilian airlines for more fuel-efficient aircraft should more than compensate for the weak military market.

Machinery and equipment

Machinery and equipment covers a range of non-automotive or aerospace engines, turbines and pumps; machine tools; and other special purpose machinery. It has tended to grow well over the past ten years because of its high export exposure (40% of output is exported) and within this, high exposure to non-European markets (62% of exports go to countries outside the EU).

The sector suffered a sharp 26% contraction in the 2008/09 recession but this has since been reversed with a 33% expansion. Machinery and equipment production broadly follows the overall manufacturing average though with more extreme peaks and troughs. Sensitivity to investment activity has been partly offset by demand from non-EU markets.

China has been a rising global force in this sector but has gained its market share primarily from the US and Japan rather than European producers like the UK. The high embodied skill component of the sector gives the highly-skilled UK workforce a competitive edge. New opportunities in renewable power applications and North African and Middle East markets mean growth prospects are expected to pick up from 2014.

Economic Prospects August 2013 8

Emerging Leaders

Electronics

The electronics sector has been in decline since the dot-com bust of 2000. More recently we have seen a slowdown in the pace of contraction, with output in the sector falling at the slower pace of 0.6% in 2012.

Prospects for the sector are looking much brighter, however, and we are forecasting a return to growth in the years ahead on the back of a recovery in investment in high-tech manufacturing. As a manufacturer of niche and high value electronics, the UK sector will build on a solid research and design base and will benefit from greater worldwide capacity utilisation. The sector also benefits from some Government policies including the ring fencing of the NHS budget, supporting medical precision equipment output.

Emerging markets pose both an opportunity and a risk for UK electronics manufacturers. While the sector will come under pressure from lower cost production, a growing middle class in these markets will increase demand and market opportunities for the UKs high-value and quality electronic products.

Rubber and plastics

UK rubber and plastics output has fallen considerably in recent years and now sits nearly a quarter below its pre-recession peak. Output is likely to fall in 2013 as well, largely as a result of a weak first quarter.

But UK plastics manufacturers are well placed for long-term growth, particularly in higher-margin specialist uses which allow oil-price and other energy cost increases to be passed on to the customer.

The recent re-growth of the UK automotive industry should provide opportunities for manufacturers who in this sector produce plastics for structural, mechanical and electronic uses.

Similarly, the government’s Help to Buy scheme is likely to provide a boost to the construction industry from 2014. As construction is a major customer for rubber and plastics manufacturers this should provide some opportunities for growth.

Finally, although environmental regulations and taxes are a threat for some plastics manufacturers, the sector should benefit from an increase in demand for recycled goods and biodegradable plastics particularly as technology will reduce the price and improve performance of these plastics.

Economic Prospects August 2013 9

Laggards

Non-metallic minerals

The non-metallic minerals sector covers manufacturing activities relating to a single substance of mineral origin and includes the manufacture of glass, bricks, tiles, cement, plaster and ceramics. It accounts for 3% of manufacturing output.

The sector is heavily reliant on the domestic market, and just a tenth of output is exported. Key drivers include the overall state of the construction sector, public sector investment in major projects and developments, private sector confidence and investment, and consumer confidence and spending. The sector was relatively one of the worst hit in manufacturing by the recession resulting from a fallout from weakness both domestically and in Europe and also in its main markets of construction and infrastructure projects.

Recent domestic infrastructure announcements and the government’s Help to Buy scheme and the resulting activity from this will do little to bolster the immediate short-term prospects for the sector, but should positively impact in the medium- to long-term.

Pharmaceuticals

The pharmaceuticals sector – comprising the manufacture of medicines, vitamins, drugs for veterinary use, vaccines and diagnostic preparations – has a different profile of growth to the manufacturing average since 2008. In contrast to the rest of manufacturing, which hit by the global downturn, started contracting in early 2008, pharmaceuticals output continued to grow through 2008 and early 2009.

Continued growth through this period was supported by relatively weaker competition from lower cost generic drugs, demand in overseas markets, new product launches and continuing demand from public health spending.

The tide has turned more recently and output has been declining in eight out of the past 12 quarters. Output is now over 30% lower compared with its peak in mid-2009. Contributing to this has been the expiration of patents on a number of significant ‘blockbuster’ drugs and with it increasing competition from lower cost generics.

While the global outlook for the industry looks fairly buoyant, much of this growth will come from emerging markets, where major pharmaceuticals companies have established research and production facilities. Closer to home, public health departments remain under budgetary pressure and are reviewing pricing structures with pharmaceuticals manufacturers. UK production should stabilise in the coming quarters, but no significant expansion is expected over the forecast period.

Economic Prospects August 2013 10

What if the US and China engines stall?

The world’s two biggest economies – the US and China – are both likely to see changes in policy in the next few years which might limit growth.

In the US, federal budget cuts will have a dampening effect on those areas of the economy most dependent on long-term government funding such as infrastructure, defence and construction. As the budget sequester led to a ‘salami slice’ approach to cutting departments budgets, the IMF has voiced concerns that it will disproportionately affect expenditures that are essential to support medium- and long-term growth.

Even if spending cuts may be outweighed by improvements in households’ financial situations, these economic improvements signal that monetary policy tightening may be a step closer. Yields in bond markets have already increased in anticipation of this. This has also fed through to mortgage rates and might limit the ability of households to counteract falls in government spending.

In China, policy focused on more-balanced economic growth has seen growth rates slow to 7.5% on an annualised basis. Recently, policy action to reduce the extent of ‘shadow banking’ has led to a squeeze on liquidity, with interbank rates doubling between the end of May and the start of July. While Chinese growth rates are unlikely to plummet, the reduced focus on investment implied by rebalancing could reduce Chinese imports.

A policy-driven slowdown in both of these economies could have a notable impact on world trade and, as a result, hit growth in the UK. In fact, if world trade were to grow at just a quarter of a percentage point less than our central scenario from 2013q3 through to 2015q4, UK GDP would be 0.6% lower in 2015.

As manufacturing is more exposed to global markets, the sector would be hit slightly more, and we forecast that manufacturing output would be 0.7% lower in 2015. However, it is likely that this effect would be more pronounced on those manufacturing sectors with the greatest exposure to the US and China.

The US in particular is a key export market for manufacturers. It is the destination for around 15%

of total manufactured exports. However, there are four sectors which send more than one fifth of their exports to the US, these are: chemicals and pharmaceuticals, electrical equipment, electronics and other transport. Of these, other transport and electrical equipment are most exposed to cuts in government expenditure, however both may benefit from opportunities elsewhere, for example, growth in shale gas is likely to provide opportunities for electrical equipment manufacturers.

Although exports to China have grown significantly, they still account for less than 4% of total manufactured exports. However, there is one sector that significantly outperforms this average: 12% of motor vehicles exports go to China. While this is a real success story for this sector, it does make it more vulnerable to a slowdown in China. However, this will be tempered by the fact that motor vehicles is a consumer-facing sector, and consumption by Chinese households is likely to continue growing strongly.

In contrast, the mechanical equipment sector is dependent on demand for investment goods, which may slow as the Chinese economy rebalances. However, this sector’s exports to China are in line with the manufacturing average and therefore any slowdown should have a limited effect on overall growth rates.

International Forecasts% annual change in GDP

2012 2013 2014

US 2.2 2.0 3.0Japan 1.9 1.2 2.2China 7.8 7.5 8.0India 5.1 5.1 6.4Eurozone -0.5 -0.6 0.9Germany 0.9 0.3 1.6France 0.0 -0.2 0.8World 3.1 3.2 3.8

Source: Oxford Economics

Economic Prospects August 2013 11

Two things to watchSteel price outlook

European steel prices have fallen considerably since the start of 2013. Between 1 January and 1 July the price of Hot Rolled Coil fell by 18% after falling 5.5% in 2012.

In part this drop has been driven by a fall in input prices. Iron ore and coking coal are primary inputs for steel and prices are heavily driven by demand from China. Weaker growth in China may continue to reduce pressure on input prices as the Chinese government seeks to rebalance their economy.

But input prices are only part of the story. Demand from key industries in Europe is a much more important driver of the steel price. The biggest steel-consuming sectors are automotive, construction and mechanical engineering, which account for around two thirds of European steel consumption. Across Europe, output fell in all these sectors in 2012 and early 2013.

Steel price prospects depend on the fortunes of these sectors. Although the European outlook has improved, a significant uptick in industrial demand in 2013 is unlikely. However, if recent improvements in business sentiment and credit conditions continue, a modest recovery in the EU in 2014 could boost demand and, as a result, the steel price.

Chart 7

Steel price falls only partially explained by input pricesPrice Index, 2010 = 100

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Employment outlook

Declining employment has been a feature of manufacturing in the UK for several decades. We saw a reversal of this trend in 2012 with the first year-on-year growth in employee numbers since the late 1990s. This was in line with manufacturers reporting growing recruitment since the end of the recession in EEF’s Business Trends Survey.

Our central forecast for manufacturing does not, however, point to further employment gains in the coming years. We do expect to see significantly slower declines in employment in 2013 and 2014 compared with the decade up to the 2008/09 financial crisis. We forecast that the number of manufacturing employees will be 0.5% lower (year-on-year) at the end of 2013 and 0.8% down in 2014. This would equate to some 60,000 fewer jobs. There will, however, be on-going demand for skilled employees in order to replace employees leaving the workforce or fill new positions which require different skill sets.

Chart 8

Slower pace of manufacturing job losses% change in manufacturing employees

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Economic Prospects August 2013 12

EEF is dedicated to the future of manufacturing. Everything we do is designed to help manufacturing businesses evolve, innovate and compete in a fast-changing world. With our unique combination of business services, government representation and industry intelligence, no other organisation is better placed to provide the skills, knowledge and networks they need to thrive.

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About usTo find out more about this report, contact:

Lee HopleyChief Economist020 7654 1537lhopley@eef.org.uk

Andrew JohnsonSenior Economist020 7654 1539aljohnson@eef.org.uk

Felicity BurchEconomist020 7654 1542fburch@eef.org.uk

Rachel PettigrewSenior Economist020 7654 1585rpettigrew@eef.org.uk

EEF Information Line0845 250 1333infoline@eef.org.uk

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