Exclusive – Steve Radley’s Economics Column

Posted on 12 Feb 2009 by The Manufacturer

Chief economist at the EEF's monthly editorial for The Manufacturer...

Steve Radley, chief economist at EEF, the manufacturers’ organisation, forecasts another tough year for British manufacturing but identifies how weak economic conditions create lower costs that can work in companies’ favour. Credit, meanwhile, must be restored for firms to avoid losses and the Government must support manufacturing to prepare for the upturn.

EEF - The manufacturer's organisation

As the world economy heads for its most serious recession for close to three decades, now might not seem the most auspicious time to start writing a regular column about manufacturing. But at these times it is vital to have a good understanding of what is happening in manufacturing, what it contributes to the United Kingdom and what needs to be done to make sure that it is well placed to take advantage of the upturn when it comes.

In the coming months, we will look in more detail at different parts of manufacturing, how it has transformed itself and the industries that are set for growth in the future. But this month, we concentrate on the outlook for manufacturing this year and the prospects for recovery.

To get the gloom out of the way, we forecast that manufacturing output will decline by 5% this year, the largest annual decline since 1981. A combination of four factors are making life particularly difficult for manufacturers: the massive destruction of wealth with knock-on effects for household spending and banks’ balance sheets; the deep-rooted problems in the banking industry; the profound loss of confidence among business and consumers, and the fact that this is a global problem. None of the original G7 nations’ economies are forecast to expand this year and most are expected to post significant declines. And the idea that countries like China and India would be able to sustain their rapid growth and compensate for weakness in the rest of the world has proved to be
hopelessly misplaced.

Foundation of recovery

But looking beyond the current very difficult situation, we can see the basis of a recovery.

Interest rates are now at historic lows across the developed world and though progress is slow there are some signs of money market rates coming down too as the massive intervention by central banks bears some fruit.

Looking to next year we should start to see some signs of life from the consumer. A massive loss in confidence and fear of job losses are major drags on consumer spending.

However, lower borrowing costs, a real improvement in affordability in the housing market and the boost to disposable incomes from the falling price of petrol, many high street goods and lower home heating bills will combine to stimulate a modest recovery in consumer spending.

The world economy should also come to our rescue. Very big stimulus packages have now been put in place in most of the world’s biggest economies, particularly in the United States, China and Germany. Not all of this money will prove to be well spent, but the scale of government intervention is immense.

In the medium term, the cost of paying back all this borrowing will be a big drag on the world economy but we should start to see some benefits later this year. And when world markets start to recover, UK manufacturers will stand to benefit from the gains in the competitiveness generated by the pound’s slide against the euro and the dollar.

Brace yourself for 2009

There is no escaping the fact that this year will be the most difficult for manufacturing and the rest of the economy for close to thirty years. And that we face serious dangers in seeing key companies, which would be viable in normal times, contract significantly or even go under, and the effect of losing skilled workers from manufacturing. This is why it is critical that the government supports manufacturing throughout this year to ensure that there is sufficient capacity to take advantage of the upturn when it comes and to contribute to a more balanced economy.

EEF has begun its own blog, featuring opinion editorials from a range of its senior economists. ‘Reality Check – indights into manufacturing and the economy’ is available at eef.org.uk/blog.