A happy New Year?

Posted on 5 Jan 2010 by The Manufacturer

EEF's Steve Radley says recession is over and the cheaper pound should finally stimulate a recovery in exports...

In essence, we expect manufacturing and the economy as a whole to expand by about 1.5% in 2010. This is a very weak recovery by past standards — when we might have been expecting the economy to expand by about 5%. However, this forecast is line with the consensus that the economy will see a long slow recovery, reflecting the view amongst business that while the worst may be over, they are not particularly feeling particularly confident they will see much growth in the short-term.

Yet when economists agree on something, there’s a strong chance that they will be wrong, and, unsurprisingly, there are substantial risks to look out for this year. One of the most important risks is whether credit from the banks will be sufficient to support the recovery. Past experience shows that the early stages of an upturn are when businesses are most vulnerable to going under, as their cash flow comes under pressures and their need for working capital grows.

EEF’s latest evidence suggests that fewer companies are reporting problems with the cost and availability of credit. But given the loss of lending by foreign banks and the long struggle by our domestic ones to rebuild their balance sheets, there must be question marks over whether the supply of credit will be sufficient and over the terms on which it will be provided.

The second big risks lies with the painful measures which the next government will need to take to scale back its current massive level of borrowing. December’s Pre-Budget statement gave a hint of what is to come, but we are likely to see much more in terms of tax rises and spending cuts over the course of this year and beyond. That much is obvious, but manufacturers will be watching anxiously to see how it’s done. Will the tightening in fiscal policy stop the recovery in its tracks? How much of an impact will the cuts in government spending have on key public sector markets such as defence? And how much of any increase in taxation will be borne by business and by manufacturers in particular?

We will also need to watch out for what happens to consumer spending. With rising house and share prices partially reversing the hits to wealth seen over the previous 18 months — and the rise in unemployment slowing — there are reasons to be a little more positive about the prospects for increased spending by households.

But the threat of higher taxation, the need to pay downdebt and more restricted credit are all likely to bear down on households and limit the rise in spending.

For manufacturers there are additional uncertainties; surrounding, for example, the pace of recovery in international markets, whether the pound will remain as volatile as it has over past year and whether the UK government takes a proportionate response to the deal on climate change agreed at Copenhagen.

Looking beyond these concerns and uncertainties, however, it is important to remember the strides UK manufacturing has made in recent years, and the many ways in which it can contribute to a re-balanced economy if given the right backing. Before the recession hit, many manufacturers were reporting their best year for at least a decade and, in some cases, on record. These results were achieved on the back of significant improvements in productivity and a renewed focus on the areas that would underpin their competitiveness such as deign, innovation and developing service offerings and niche markets. It is vital, therefore, that we keep the profile of manufacturing high and champion its achievements and the importance of giving it the right backing.

For EEF, this involves supporting Manufacturing Insight in its campaign to send out a positive image for manufacturing — particularly to students and those who are advising them. But we will also be running our own high profile campaign centred around the role that manufacturing needs to play in our economy.

This will culminate in our own Manufacturing Week at the start of March when we will publish our Manifesto for Manufacturing and hold a number of high profile events across the country. In particular, we will be providing a range of opportunities for manufacturers to engage with current MPs and potential new ones.

In a year when we will see a General Election and significant change in Westminster, it is vital that we carry our message to those who will be taking decisions affecting the future of manufacturing in this country. We urge as many of you as possible to get involved.

By Steve Radley, chief economist at EEF