1. UK manufacturing – past, present and
future
February 2012

2. Manufacturing output fell rapidly in 2008/9...
% balance Volume of output
+50
+40
+30
+20
+10
0
-10
-20
-30
-40
-50 -43
-49
-60 -53
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Source: CBI Industrial Trends Survey

3. ...as demand both at home and abroad fell
sharply...
% balance Manufacturing order books (above/below normal)
+20
+10 Total order books Export order books
0
-10
-20
-30
-40
-50
-60
-70
Source: CBI Industrial Trends Survey

4. ...and firms depleted inventories markedly
Volume of stocks
% balance
+15
+10 Raw materials Work in progress Finished goods
+5
0
-5
-10
-15
-20
-25
-30
-35
-40
2008
2000
2001
2002
2003
2004
2005
2006
2007
2009
Source: CBI Industrial Trends Survey

5. Demand began to recover over H2 2009 and
2010
% balance Manufacturing order books (above/below normal)
+20
+10 Total order books Export order books
0
-10
-20
-30
-40
-50
-60
-70
2008
2000
2001
2002
2003
2004
2005
2006
2007
2009
2010
Source: CBI Industrial Trends Survey

6. Export orders were boosted by a sharp
depreciation in Sterling
Jan 2005=100 Sterling effective exchange rate
110
105
100
95
90
85
80
75
70
2011
2003
2004
2005
2006
2007
2008
2009
2010
Source: Bank of England

7. Manufacturers began to replenish inventories
Volume of stocks
% balance
+20
Raw materials Work in progress Finished goods
+10
0
-10
-20
-30
-40
2011
2004
2000
2001
2002
2003
2005
2006
2007
2008
2009
2010
Source: CBI Industrial Trends Survey

8. Both factors facilitated a strong recovery in
the manufacturing sector
% balance Volume of output
+40
+30
+20
+10
0
-10
-20
-30
-40
-50
-60
1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: CBI Industrial Trends Survey

9. But sharply rising costs led to a strong build
up of inflationary pressure
+70
% balance Costs and output prices
+60
Average unit costs Domestic output prices
+50
+40
+30
+20
+10
0
-10
-20
-30
-40
2006
2002
2003
2004
2005
2007
2008
2009
2010
2011
Source: CBI Industrial Trends Survey

10. Sentiment deteriorated sharply over H2 2011
% balance
+30 Business optimism
+20 Overall business situation Export prospects
+10
0
-10
-20
-30
-40
-50
-60
-70
2006
2007
2008
2009
2010
2012
2011
Source: CBI Industrial Trends Survey

11. Concern over political and economic
conditions abroad rose sharply
% of
Factors likely to limit export orders:
respondents
political/economic conditions abroad
60
50
40
30
20
10
0
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: CBI Industrial Trends Survey

12. But demand began to recover at the turn of
this year...
% balance Manufacturing order books (above/below normal)
+20 Total order books Export order books
+10
0
-10
-20
-30
-40
-50
-60
-70
2011
2006
2000
2001
2002
2003
2004
2005
2007
2008
2009
2010
Source: CBI Industrial Trends Survey

13. ... supporting expectations for output growth
% balance Expectations for output growth
+40 (next three months)
+30
+20
+10
0
-10
-20
-30
-40
-50
-60
2007 2008 2009 2010 2011 2012
Source: CBI Industrial Trends Survey

14. Manufacturing output will continue to rise
modestly ahead
y/y% Manufacturing output
8.0
6.0
4.0
2.0 CBI forecast
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
-14.0
2011
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
Source: ONS/CBI

15. A comparatively weak Sterling will continue
to support export orders
Jan 2005 = 100 Sterling effective exchange rate
110
105
100
95
90 CBI forecast
85
80
75
70
2011
2007
2003
2004
2005
2006
2008
2009
2010
2012
2013
Source: Bank of England/CBI

16. But longer-term challenges arise from a period
of structurally higher commodity prices
GMO chart?
Source: McKinsey & Company: “Resource Revolution: Meeting the world’s
energy, materials, food and water needs”, November 2011

17. Strong need to rebalance exports towards
BRICs and emerging markets
% Destination of UK exports vs GDP growth forecasts
18
Share of UK exports (% of total) Average annual % growth 2011-16
16
14
12
10
8
6
4
2
0
United States Germany Netherlands France China India Russia Brazil
Source: IMF/ONS

18. Sectors that exploit strong emerging market
demand are likely to thrive
Automotive Civil aviation
• Automobiles currently account • Strong growth in global
for 10% of UK exports passenger traffic
• Can benefit from strong • But emerging market
Chinese demand – the world’s manufacturers also looking to
largest automotive market. establish presence
Electrical and optical & High end/luxury consumer
high-tech goods goods
• The UK already has a strong
comparative advantage • A growing wealthy middle class
in emerging economies will be
• Rising incomes and a potential market.
demographic changes in EMEs
– expect approx 10% growth
per annum.
Source: CBI

19. In summary…
● Manufacturing was severely impacted by the global downturn in
2008/2009.
● After a robust recovery, the sector saw softer activity in H2 2011.
● But, demand and output expectations have recently been stronger.
● Challenges ahead:
– Adjustment to a period of higher and more volatile raw materials prices.
– Need to sustain growth by re-orientating exports to high growth markets.

20. UK manufacturing – past, present and
future
February 2012