Chorus of hope drowns out doom mongers

As the official bell tolls confirming the recession, it might seem surprising that there are still plenty who believe the suffering will be short-lived.

As the official bell tolls confirming the recession, and the week’s press is full of dark tidings from manufacturing industry, it might seem surprising that there are still plenty who believe the suffering will be short-lived.

Figures published this week by National Statistics show the UK’s manufacturing sectorexperienced a second consecutive quarter-on-quarter fall in output – the official measure of recession. Production fell by 2% in the second quarter of the year, after a 0.7% drop in the first quarter.

But Alan Wilson, senior economist at Oxford Economic Forecasting, said life for manufacturers will improve again early next year. ‘Things should stop getting worse by the end of this year, and there should be a modest pick-up from then on. Output will increase by 0.75% in 2002, and a further 2.75% in 2003.’

The recession has not yet spread to the retail and service sectors, which should help to lessen the impact on manufacturers by keeping domestic demand high, he said. Consumer confidence appears to remain strong – figures from the Society of Motor Manufacturers and Traders reveal new car sales rose by a record 11.6% last month.

‘It will help to limit the losses in manufacturing if domestic demand is sustained. our expectation is still of a relatively soft landing, and a recovery next year,’ said Wilson.

The main source of the recession in manufacturing has been the problems within the electronics and telecoms sectors. Two-thirds of the 2% drop in output across manufacturing as a whole came from these areas, which saw a decline of 7.9% during the quarter. Forecasts for demand proved too optimistic, forcing manufacturers to run down inventories and cut back production, said Michael Hume, economist with Lehman Brothers.

But there are already signs of an improvement, he said. The sector saw a slight growth in June, up 0.8% on the previous month, driven by a 4.5% rise in computer production. ‘I’m reasonably hopeful – as far as engineering is concerned we should start to see slightly better production figures over the next three-to-six months. Surveys for July indicate inventories are pick ing up, and anecdotal evidence suggests demand for personal computers has bottomed-out.’

Manufacturing output as a whole rose 0.3% in June, surprising analysts who had expected a further fall. With the exception of basic metals, each manufacturing sector recorded a modest rise for the month, said Ross Walker, UK economist at the Royal Bank of Scotland. ‘The very modest rise in June was at least pretty broad-based. Output will fall further in the third quarter, but stablise by the year-end as global demand begins to recover,’ he said.

Not all manufacturing sectors have been badly hit. Figures from the Society of British Aerospace Companies show the UK’s aerospace industry is outperforming the rest of the engineering sector. Output increased by 41% in 2000, compared to a fall of 4% for the rest of the sector.

‘Quite a lot of the problems in the downturn have been related to electronics, and the aerospace industry has been reasonably well insulated from that,’ said Stephen Radley, chief economist at the EEF.

But the sector would be unlikely to escape the effects of the recession if it was to become too severe, Radley added.

Any recovery, though, may still come too late for some within manufacturing. The Confederation of British Industry has warned that up to 29,000 jobs could be lost in UK manufacturing between July and September this year.

And there is no relief in sight for struggling exporters hoping the pound-euro exchange rate will improve.

Neil MacKinnon, analyst at Merrill Lynch, said the euro may make a modest recovery as the dollar weakens, but it is difficult to see the currency ever being very strong. ‘Global investors have very little faith in the currency, it has lost them money in the last two years because of its poor performance, and fund managers have been taking their money out of the eurozone and putting it elsewhere.’

The Bank of England took a step towards helping manufacturers by cutting interest rates by a quarter of a percentage point to 5% last week, but more will need to be done, he said.

‘There is still room for lower interest rates in the UK in the months ahead.’