Business output returns to growth due to a manufacturing boom while the services sector lags

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Manufacturers are boosting business output, but they make up a small portion of the UK's total economic output (Source: Getty)

British factories are providing a glimmer of hope amid the UK's gloomy economic outlook, with one closely-watched survey expecting the sector to propel business output back into growth.

After a positive few years, GDP expansion has been sluggish so far in 2017 with Bank of England governor Mark Carney warning last week that the economy is "in the teeth of it right now".

Accountancy firm BDO records how businesses expect their order books to develop over the next three months. In July the firm's index showed an ominous drop in business output.

However, its latest survey – published this morning – says the ongoing recovery of the UK's manufacturing sector has returned overall output to growth.

Read more: Puzzle deepens as strong UK manufacturing PMI contradicts official data

“Amid slowing growth in the economy as a whole, UK manufacturing is a definite bright spot at the moment," said Peter Hemington, a partner at BDO.

The manufacturing sector climbed closer to the long-term growth trend score of 100 in July, according to to BDO's sub-index, rising to 98.6 from 97.6 the previous month.

The findings chime with other data surrounding the factory sector, which has been boosted by a weaker pound. Last week's IHS Markit purchasing managers' index (PMI) for the manufacturing industry rose to 55.1, well above economists' consensus expectations of a 54.4 reading.

Services growth lags

But while the sector's growth was encouraging for the UK's economic health as a whole, it only accounts for about a tenth of all UK economic output.

Meanwhile, growth in the key services sector, which makes up the most of the UK's economy, stagnated in July according to BDO.

The services sector's output index remained at 94.4 for the second month in a row, signalling shrinking order books in the next quarter, which would stunt the UK's economic growth towards the end of 2017.

“Our sense is that the recovery is weakening month on month," Hemington said.

He added that tightening monetary policy by hiking interest rates at this stage would be a mistake.

Further, we think that there is a role for a somewhat more expansionary fiscal policy when Brexit uncertainty starts to bite further as we go into 2018.

Optimism swells

Despite the challenges and uncertainties, BDO's optimism index, a measure of how firms expect order books to develop in the next six months, was also boosted by the manufacturing sector.

As a whole, optimism edged up to 103 in July from 102.9 the previous month, while optimism in the manufacturing sector rose to 121.4, well above the long-term trend.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, today called for the government to back the sector's ambition by clarifying gaps in the industrial strategy left by uncertainty around Brexit.

Hopley said:

The UK is facing a potentially game-changing point as we leave the EU whilst the sector is also on the cusp of massive technological change and grappling with long-term investment decisions.

Policy makers must now focus on evolving the positive policy framework set out earlier in the year into clear strategy which gives manufacturers confidence about the competitiveness of the UK in the future.

Read more: British manufacturing order books strongest in almost 30 years