David Smith.. The manufacturing mystery

Posted on 2 May 2008 by The Manufacturer

The air is thick with stories of deepening economic gloom as the credit crisis that started in America spreads its tentacles around the world. These are puzzling times for Britain’s manufacturers, says David Smith

I n Britain, consumer confidence has slumped as activity has dived in the housing market. The Bank of England is predicting a sharp slowdown in growth which Andrew Sentance, a member of its monetary policy committee, says will be ‘more significant and sustained’ than any in the past 15 years. We have also had the return of nationalisation, in the form of Northern Rock, enough to give anybody the jitters.
Yet, if the latest evidence from the CBI is anything to go by, manufacturing is doing rather well. Its latest monthly industrial trends survey, published in February, continued what the employers’ organisation described as the longest
run of sustained demand for 12 years, bucking the slowdown in other parts of the economy.
The CBI survey is based around ‘balances’ – the balance of firms saying order books are above or below normal. The latest survey showed that a balance of three per cent of firms said order books were above normal. This was the 10th time in 12 months that they have been in ‘healthy’ territory, making the past year the best since 1995.
Interestingly, at a time when consumer spending is expected to slow, the driver of manufacturing growth is coming from elsewhere.
Over the past 20 years order books for capital goods have only been as healthy once before – last August. Even a slippage in export orders – a balance of eight per cent of firms said they were below normal – did not detract too much from a healthy overall.
“While manufacturing is not going to be immune to weaker demand at home and abroad, the recent depreciation in sterling will be a helpful boost for exporters over coming months,” said Ian McCafferty, CBI’s chief economic adviser. “A resilient, export-orientated manufacturing sector is exactly what we need as we enter a tricky period of rebalancing the economy away from its dependence on domestic demand.”
Could this be the beginning of the great rebalancing that the Bank of England and others are keen to see? One note of caution arises from pricing pressures. Industry saw a huge jump in raw material and fuel costs in January, up by more than 19 per cent on a year earlier. Factory gate prices were up by 5.7 per cent on a year earlier. Increases of this kind are not compatible with the official two per cent inflation target.
Unless cost pressures subside, manufacturers may face a severe margin squeeze.
McCafferty is right that sterling’s lower level against the euro will help, but if the European economy is slowing, as it appears to be, exporters may find themselves running just to stand still.
The strength of capital spending, similarly, may reflect the last vestiges of the global boom, not the prospects for the future.
If UK manufacturing is enjoying a revival, it is doing so unaided, according to Sir John Rose, chief executive of Rolls-Royce. Giving evidence to the Commons Business, Enterprise and Regulatory Reform committee, he attacked the idea that it is acceptable for Britain to be regarded as a “post-industrial service economy”. Other countries, he said, emphasised their manufacturing sector, while Britain ignored its industry. “Brazil, India, Singapore, Russia – they are all
articulating a vision of high value-added manufacturing being a significant part of their economy.
As does the US and Canada – the list is long,” he said. There was a desperate need for more young people to enter manufacturing through apprenticeships, but there was also a desperate need to ensure there was a future for them
The truth is that a genuine rebalancing of the economy will require a much bigger manufacturing sector.
A manufacturing sector of less than 15 per cent of gross domestic product and a £61 billion trade deficit in manufactured goods last year are testimony to Britain’s lack of balance.
Are there reasons for optimism? The troubles that took Northern Rock into the arms of government tell us that there should be more to an economy than financial and business services and retailing. Sterling’s fall last year was partly
in response to the record trade deficit.
Perhaps this is a turning point. I would not bet too much on it, however.