Which sectors are fuelling the recovery?

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Prime Minister David Cameron has been telling the business leaders' organisation, the CBI, how his government is going to help the economy grow in the coming years.

Image caption,
Manufacturing has been one of the major contributors to the recovery

It comes a month after the CBI itself predicted that the UK economy would grow 2% next year, rather than the 2.5% it had forecast in June.

It blamed the revision on the VAT rise to come in January and on low wage settlements.

While it predicted slower growth, it meant the organisation was still confident that growth would continue.

The UK came out of recession in the last three months of 2009. On Tuesday, the Office for National Statistics will give its first estimate of growth from July to September this year.

If, as expected, that quarter turns out to have delivered growth, then at the end of September the UK economy will have been growing for a year.

But where has the growth come from?

"Manufacturing has led the recovery so far," says Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club.

"The sectors that fall the furthest tend to come back fastest as well."

The service sector, on the other hand, shrank less significantly in the recession, partly due to continuing demand from the public sector, and has grown less since it ended.

Between April and June this year, the biggest growth area - compared with the same period of 2009 - was construction

This was largely because the sector had slowed down so much in the recession that any activity would show strong growth.

After construction, the strongest area was manufacturing. One of the reasons that manufacturing tends to decline fast and then recover fast is the way that other businesses deal with their stock.

In a recession, retailers will try to leave it as late as possible to replace the goods they have in stock in case they do not get sold.

Similarly, businesses will leave it as late as possible to replace or update equipment.

But destocking can only go on for so long, and once a recovery comes businesses have to replace their stock to take advantage of the upturn, which creates business for manufacturers that survive the recession. There are signs that we are now into the next stage.

"The process of restocking has finished and what we're seeing now is real demand," says Lee Hopley, chief economist at the manufacturers' organisation, EEF.

"There has been particularly strong growth from manufacturers exporting to emerging markets in Asia," she adds.

'Remarkable recovery'

Conditions are still reasonably favourable for manufacturing exporters, with the pound relatively weak and some signs of recovery among the countries that are UK's biggest customers in Europe.

"The UK has recovered quite remarkably from the crisis, but this growth has been supported by government measures," warns Paola Subacchi, research director for international economics at Chatham House.

"The question is how much of the growth has been due to the measures to support the economy."

For example carmakers were boosted by the car scrappage scheme, which has now finished.

Now the question is not only how the economy will grow without stimulus measures, but also how it will cope with the austerity measures that the government has brought in to try to reduce its debts.

"Next year, with the VAT rise and employee National Insurance going up, will be key, although there have been some signs in surveys that firms are already adjusting their behaviour in anticipation," says Mr Goodwin.

"And all this must be looked at in the context that output is still quite a long way down on pre-recession levels."

A particular problem for the private sector coming from last week's Spending Review is that many private companies see the government as a major customer, and if projects are cancelled then they will lose orders.

Lower growth

Many analysts say that the UK should not expect to return to the growth rates seen before the credit crisis in the near future.

Mr Goodwin says a figure of 2.25% growth is much more realistic than the 3% level that used to be the norm.

"The last decade has had factors such as rapid population growth due to EU expansion, which are unlikely to be maintained," he says.

Paola Subacchi agrees that we are unlikely to return to the prosperity of the past, but she has some better news for the UK.

"In the next couple of years what is important is flexibility to adapt to change and possible difficult circumstances," she says.

"In the UK I can see strengths because of the more flexible labour market."

Ms Hopley sees other signs of flexibility from UK industries.

"Manufacturers are looking to reduce their exposure to the public sector and look to new markets instead," she says.

Ms Subacchi agrees. "We have to think in terms of exports.

"That is not what the UK is used to doing and it is a big part of rebalancing the economy."