Britain’s manufacturing boom could soon hit a ceiling and even a pickup in investment may not solve the problem.
According to the latest Confederation of British Industry report, manufacturing is enjoying the twin benefits of a weaker pound and an upturn in global demand, with orders at the strongest in more than three decades.
But while the industry is the economy’s bright spot for now, stock levels are dwindling and the gap between demand and output expectations suggests that manufacturers are “struggling to keep up with orders,” said Samuel Tombs at Pantheon Macroeconomics.
Even if firms stepped up spending to provide extra capacity now, it wouldn't come quickly enough for them to match demand.
Signs of a squeeze are likely to worry the Bank of England, which hung its November interest-rate increase on supply constraints and the economy’s reduced “speed limit.” That’s partly related to Britain’s weak productivity growth and means the potential for damaging inflationary pressure even at a slower growth pace.
The U.K. is forecast to expand 1.5% this year and 1.4% in 2018, lagging both the euro area and the U.S., according to Bloomberg surveys.
The CBI’s latest survey isn’t the first to point to constraints. A previous report showed that the percentage of firms operating below capacity is the lowest in almost two decades. While additional capital spending could help, this is no a quick fix, Tombs said.
“The recent progress in Brexit talks might give manufacturers confidence to undertake investment projects that they have delayed over the last 18 months.
“But investment won’t boost capacity quickly enough to make a swift difference. The risk, then, is that the U.K. economy fails to capitalize fully on the recovery in global trade and remains the G7’s laggard next year.”
By Fergal O'Brien