With the pound hitting a record low against the euro, the exchange rate may finally be working to manufacturers’ advantage, says David Smith
The headlines about the UK economy have got gloomier. The International Monetary Fund has slashed its forecasts for the world economy. Yet the mini-revival of manufacturing continues.
Official figures published in April showed that manufacturing has enjoyed three healthy output increases in a row to take the level of output two per cent up on a year earlier. If sustained, this will be faster than most economists’ predictions for growth in the economy as a whole. It is a long time since manufacturing has outgrown the rest of the economy. Many people had thought it might never happen again.
What’s more, it appears to be a bit of a trend. The Engineering Employers’ Federation points out that the average monthly growth in manufacturing over the most recent six months is more than three times its average over the previous eight years. The EEF thinks there is something fundamental about industry’s revival.
As its senior economist Jeegar Kakkad, puts it: “Manufacturers are continuing to defy the economic gloom by reaping the rewards of investment and growing world markets. Having taken tough decisions to improve their performance and competitiveness, we cannot afford to let the problems in the financial sector spill over into the wider economy where the economic fundamentals remain sound.”
Long-term readers of The Manufacturer will know that there is another factor at work which, after holding out the hope for so long, I had given up predicting. Manufacturing is benefiting from a lower pound, particularly in relation to Europe.
As I write, sterling has just hit a record low of 1.25 euros. The euro, in other words, has reached a high of 80 UK pence.
This is the direct route through which the problems in the wider economy are benefiting manufacturers. The more pressure there is on the Bank of England’s monetary policy committee to cut interest rates, the more that currency traders sell the pound, notably against the euro, where the European Central Bank’s reluctance to contemplate a reduction in its interest rates are giving the single currency deutschemark-style strength.
So, manufacturers are getting a lift from sterling’s depreciation. It shows up in export orders, where balances are holding up at close to their best levels since the mid-1990s. And it shows up in the official numbers, where exports are up by around 7.5 per cent – in value – compared with a year earlier.
That is the good news. Manufacturers know, however, that it is never all good. Take the IMF’s latest forecasts. The benefit of a weaker pound is not just in export markets. Firms benefit from greater competitiveness domestically.
Unfortunately, if the IMF is right, the UK economy will grow by only 1.6 per cent this year and next.
That does not preclude UK firms increasing their market share but it is a share of a slowly growing market.
The same is true when it comes to the wider world. The IMF expects 3.7 per cent global growth this year and next, which does not sound that weak, but it compares with an average of nearly five per cent over the past four years.
Sadly, the slowdown is concentrated in places where Britain can most expect to gain as a result of a lower pound. Growth in the advanced economies is put at just 1.3 per cent in both 2008 and 2009, dragged down by America, which is seen crawling along at 0.5 per cent this year, 0.6 per cent next. Europe, which might have been expected to make up some of the global slack, is predicted to grow by 1.4 per cent in 2008, slowing to 1.2 per cent in 2009. It is, as with the domestic market, perfectly possible for UK companies to increase share, even in slow-growing markets.
But it is harder work. So the challenge for manufacturers is to make the most of a lower pound, even when circumstances are not ideal. There will still be plenty of opportunities, such as in the Asian and Middle Eastern markets, where UK firms will be at an exchange-rate advantage compared with their European counterparts. The test will be whether they have the products to back up that advantage.