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Embargoed till 00.01 Friday 11 February 2011

UK Industrial Press Release

 

Manufacturing and financial & business services will support GDP growth of close to 2% in 2011, but the prospects for rebalancing are weak

 

 

Cambridge Econometrics today releases a new version of the UK Industrial area of its Knowledge Base, which contains detailed macroeconomic and industrial forecasts to the year 2025. These forecasts are based on MDM-E3, Cambridge Econometrics’ 41-sector model of the UK economy.

 

Our forecast is for modest GDP growth of just under 2% in 2011 supported by strengthening net trade and investment, as government spending falls and household spending remains subdued due to high inflation and uncertainty in the labour market. In 2012, a sharper fall in government spending is expected to offset growth in the other components and prevent GDP growth from accelerating (see chart: Final Expenditure Components of Growth).

The private sector will create enough new jobs to offset public-sector job cuts

The key hope of the government is that the private sector will lead the recovery and create enough new jobs to offset the job losses expected in the public sector over 2010-15. Our forecast suggests that this will be achieved. Between 2010 and 2015 we expect employment in the public sector to fall by just over 400,000, and employment in the private sector to increase by more than 700,000. In more detail, we expect the increase in private-sector employment to offset the fall in public-sector employment in each year between 2012 and 2015. However, the outlook for the labour market in 2011 is bleak as we expect both private and public-sector employment to fall, making 2011 the toughest year for households in the whole period 2010-15.

The steepest fall in 2011 will be in full-time employment, although two-fifths of the lost jobs will be part-time or self-employed. Of the increase in total employment over 2010-15, around two-fifths will be in self-employment and around half in full-time employment. The increase in part-time employment is expected to be small. And despite the rise in employment, we still expect unemployment to increase over 2010-15 (see table: Main Economic Indicators).

 

UK GDP growth will be driven by financial & business services and manufacturing in 2011

Growth in 2011 is expected to be led by manufacturing and financial & business services, as the public sector contracts and the recovery in construction lags behind that in other sectors.

Growth in exports and investment demand is forecast to support output growth of just under 3% in manufacturing in 2011. The metals, engineering and transport equipment industries should all enjoy robust growth in 2011 as demand for machinery and equipment picks up. In Engineering, after the present restocking and catching-up with the backlog of contracts is over, the other forces that drove growth in engineering for the energy industries, for special instruments and equipment and for specialist electronics are expected to remain strong in 2011 and 2012. The stronger output growth in manufacturing in 2012 and 2013 will also be supported by higher growth rates in Basic Metals and Electronics.

In Construction, the two main reasons for our forecast of little output growth in 2011 are the large reductions in government capital spending and the depressing effect on the housing market of weak consumer confidence and tight credit conditions. The construction industry should return to more modest growth in 2012.

Meanwhile, in Market services those activities most reliant on consumer and public-sector spending face the greatest uncertainty in the short term. Growth in 2011 will be driven by Financial & business services and by Computing services. Among business services, management consultancy and the legal sector are expected to benefit in particular from the recovery in Banking & Finance; and Computing Services is expected to benefit from relatively strong private-sector demand. The outlook for those areas of Professional Services that rely on the property market and construction sector remains weak.
In the medium term, Water Transport and Air Transport will benefit from the increase in trade associated with the strengthening of the global economy in 2012 and 2013. Demand for Other (non-professional) Business Services will remain strong, reinforced by continued cost cutting and the trend towards specialisation in service provision, both of which facilitate outsourcing.

 

The prospects for rebalancing the UK economy are weak

Our forecast suggests that there will not be much rebalancing of the UK economy by 2015. We expect manufacturing’s share of value-added in 2015 to be a little lower than it was in 2007 (see chart: Sector Shares of UK GVA), before the recession started, and we forecast that its share of employment will continue to fall. In contrast, we expect Financial & business services to account for larger shares of value-added and employment than it did in 2007.

Furthermore, between 2007 and 2015 the share of value-added accounted for by the public sector will fall only slightly, while the public sector’s share of employment is forecast to increase, despite the fall in headcount over 2010-15 (see chart: Sector Shares of UK Employment).

  

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Notes for Editors

Cambridge Econometrics today releases a new version of the UK Industrial area of its Knowledge Base, which contains detailed macroeconomic and industrial forecasts to the year 2025. These forecasts are based on MDM-E3, Cambridge Econometrics' 41-sector model of the UK economy.

Cambridge Econometrics is an independent private limited company and is owned by a charity, the Cambridge Trust for the Promotion of New Thinking in Economics. It has been providing detailed economic and industrial forecasts since 1978, and its system of quality management for economic modelling has been approved as complying with ISO 9001:2000. Our company also provides detailed regional and energy forecasts for the UK, and regional and sectoral forecasts for the European Union.

We provide the most detailed long-term economic and industrial forecasts available for the UK. The projections are based on the 'Cambridge model', known as the Multisectoral Dynamic Model of the UK economy (MDM-E3), and originally developed in the University of Cambridge Department of Applied Economics (in the 'Growth Project' set up in 1960 by Professor Sir Richard Stone, the 1984 Nobel Laureate in Economics, and Alan Brown). This large computerised system has approximately 5,000 endogenous variables and nearly 16,000 behavioural parameters and other coefficients. The model is continually revised and improved to take account of new data and advances in economic theory and econometric techniques.

The current version of the model, MDM-E3 (Revision 6482), has 41 industries defined according to the 2003 Standard Industrial Classification; 16 of these are services. It covers the whole of UK industry with its 41 industries and is the leading energy-environment-economy model in the UK. The forecast uses chained volume measures with reference year 2006.

The cut-off date for the information used in the model run for this report was 1 December 2010.

Access to our updates is normally obtained by companies and government departments by subscription to the company's industrial service at £6,540 per annum. The UK Industrial area of CE's Knowledge Base is updated twice a year.

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For further information contact:

Graham Hay
Manager, UK Industrial Service
Email: info@camecon.com

Tel: 01223 533100