Industry Sector Weekly by Lloyds

The focus in this Sector Weekly is to provide an update of our top-down industry forecasts for the UK. Our forecasts show that the business service sector’s contribution to overall growth is expected to rise. This is likely to reflect significant growth in the outsourcing of activities and potential for a strong rise in business investment. An update of our UK industry sector forecasts

The focus in this Sector Weekly is to provide an update of our top-down industry forecasts for the UK. Our forecasts show that the business service sector’s contribution to overall growth is expected to rise. This is likely to reflect significant growth in the outsourcing of activities and potential for a strong rise in business investment.

The other notable development is a significantly positive contribution to growth from manufacturing in the coming years, reflecting the boost for UK exporters from a sustained fall in the pound. In contrast, sectors more reliant on UK consumption are likely to experience tougher times.

Business services and manufacturing to contribute more to GDP in the coming years

Our forecasts show that the business services sector’s contribution to growth is expected to be even larger in the next five years. This is likely to partly reflect significant growth in the outsourcing of activities, particularly as the government reduces the fiscal deficit and aims to raise productivity in the public sector.
Therefore, the direct contribution of government to overall GDP is forecast to shrink. It may also reflect significant financial surpluses built up in the non-financial corporate sector in recent years (despite the impact of the recession on profits), meaning that there is potential for a significant uplift in business investment, if the economic recovery becomes more entrenched.
The other notable development is the expected contribution of production (mainly manufacturing) to average GDP in the next five years. During 2003-7, the overvalued pound, supported by a strong financial services sector, meant that production actually subtracted from overall GDP growth. This was also reflected in a widening of the trade deficit. However, the sustained fall in the pound has provided a benefit for UK exporters in that it has made their goods more competitive, though some exporters may have used that to increase margins rather than market share. A key challenge for UK manufacturers is to steer towards higher value-added capital goods and to focus more on faster growing
export markets in the emerging economies, rather than the eurozone. This, of course, rests on the assumption that emerging markets successfully rebalance their economies in favour of consumption.

In contrast, sectors more reliant on UK consumption are likely to experience tougher times. The construction and distribution (including retail) sectors, for example, are forecast to contribute less to overall GDP than in the recent past. In terms of financial market risks, chart c shows that companies have become more concerned about impact of inflation, commodity prices and interest rates on their businesses in the past six months. Concerns about FX risks also remain significant for both exporters, such as manufacturers, and importers, such as
retailers.