Plans to rebalance economy at risk as manufacturing optimism drops

As the prospects of the UK services and manufacturing industries continue to diverge, the government's plans to rebalance the UK economy are increasingly at risk, a study finds.

BDO’s optimism index, which predicts growth six months ahead, remains above its long-term trend at 101.9, indicating that UK businesses expect their order books to continue to grow strongly.

However, this is driven by the buoyant services sector, masking serious concerns among manufacturers.

Manufacturers’ optimism is deep in negative territory at 90.2, showing that manufacturers are gloomy about the future. In contrast, the services sector is expecting rapid growth, with optimism scores well above the trend at 104.2.

Short-term economic prospects, as predicted by BDO’s Output Index, are more positive, with all sectors expecting strong growth and output over the next three months. 

The BDO output indices sit at a healthy 103.8 and 103.9 for manufacturing and services respectively.

The contrast between the manufacturers’ Output Index, which reflects actual experience of order intake, and the Optimism Index, which reflects judgements as to how business will develop, is stark. 

The UK’s makers may fear a sudden contraction as we go into 2016, even if trading remains strong today.

These trends could see the UK economy become even more unbalanced as sluggish manufacturing growth becomes entrenched and the UK becomes even more reliant on the service sector for growth.

BDO partner Peter Hemington says, ‘These figures show that the UK needs to act now to support our manufacturing industry. The government must do more to encourage investment and help the sector to grow.

‘The government’s plans to encourage a more balanced economy are clearly right, but need to be accompanied by far more action. For instance, incentives to invest and plan for future success should be increased significantly.’

BDO’s Building the New Economy Report calls for a greater role for manufacturing in helping to rebalance the economy and makes a series of policy recommendations, including zero VAT for supplies to exporters.

The UK currently allows manufacturers to zero rate their exports. However, it is less generous with reliefs for domestic companies that supply to UK exporters, BDO believes.

In contrast, Ireland has a more generous relief for regular exporters, the firm says, where a qualifying exporter is able to inform its suppliers of its export authorisation and those suppliers can then zero rate their supplies to the qualifying exporter. BDO recommends that the UK introduces a similar relief.

Increasing the annual investment allowance is also a suggestion. Productive manufacturing needs investment, and government must encourage this in every way possible, BDO says.

The company strongly supports the steps taken in this direction by increasing the annual investment allowance to £200,000 (and a temporary increase to £500,000), but this step is not seen by BDO as the game changer needed to unleash manufacturing might.

Government should take the bold step of increasing the annual investment allowance for expenditure on plant and machinery to £5 million for five years, the firm suggests. 

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