UK factories ride crest of European upturn, for now - survey

LONDON, Sept 5 (Reuters) - Fuelled by a resurgent European economy, the highest proportion of British manufacturers in at least 20 years now report rising output and orders, despite gloom around the outlook at home, an industry survey showed on Tuesday.

While Britain's factories have failed to contribute to official measures of economic growth so far in 2017, a stronger second half to the year looks in store, according to a quarterly report from manufacturing association EEF and accountants BDO.

The survey's gauges for orders and output hit their highest levels since records started in 1995, with respondents reporting especially strong demand from the European Union. By contrast, domestic orders "remained on the softer side", the report said.

Three-fifths of British factories described demand from Britain's largest export market as positive, double the proportion for Asia.

"This period is likely to be the peak, however, and we are likely to see a more stable picture in the coming months rather than any further significant acceleration," EEF chief economist Lee Hopley said.

"There is little doubt that Brexit is likely to weigh on sentiment over the next twelve months with uncertainty over the UK's terms of exit," she added.

Britain's economy had its slowest first half of the year since 2012 as households came under pressure from a big rise in inflation following the fall in sterling caused by last year's Brexit vote.

Manufacturers, who make up around 10 percent of British economic output, became more downbeat about the outlook for Britain's economy for a second quarter running, the EEF/BDO survey showed.

Overall the report fitted with the idea that British manufacturers are in the midst of a temporary "sweet spot".

Bank of England Deputy Governor Ben Broadbent used that phrase in March to describe a window in which producers could enjoy the benefits of a weaker currency, before the possible downsides of Brexit come to fruition.

The EEF/BDO report showed manufacturers have used the pound's fall since last year's Brexit vote to accumulate profit, perhaps explaining why investment levels were "not as positive as might be expected" given strong output and orders.

Nonetheless, the survey's gauge of manufacturing investment picked up to a two-and-a-half year high.

A separate monthly Markit (NasdaqGS: MRKT - news) /CIPS survey last week also pointed to a brighter outlook for British manufacturing in the second half of 2017.

Still, evidence remains patchy that sources of economic growth like exports and investment will seriously compensate for a slowdown in consumer spending.

EEF stuck to its forecast that Britain's economy will expand 1.6 percent this year and 1.3 percent next year, matching the consensus of the latest Reuters poll of economists.

"It is vital the government sends a signal to industry and investors in the UK and overseas that it is doing everything in its power to get growth of the UK economy back on the agenda," Hopley said.

The EEF/BDO survey was conducted between Aug. 2 and Aug. 23 and covered 416 manufacturers. (Reporting by Andy Bruce)