Defensiveness is no response

What would manufacturers give for a reliable crystal ball at the moment? Not for some time has the outlook been quite so uncertain. On top of global slowdown and an increasingly two-speed economy in the UK has come international conflict.

While the airlines have suffered, and reacted quickly, the wider effect on consumer confidence can only be guessed at.

Luxury car manufacturers are already seeing a sharp decline in the US market although some of this must have been driven by the pre-‘September 11th’ slowdown in the US economy. In the UK, meanwhile, the car market is booming. September was a record month for sales, exceeding the most optimistic forecasts.

Cars are just one apparently anomalous market. There are many other conflicting signals.

Last week the British Chambers of Commerce echoed a series of warnings from other employers’ organisations in revealing the gloomiest sentiments in manufacturing for eight years, and saying that a number of indicators including export levels, home orders and investment are at their weakest since 1998.

However, manufacturing output showed a 1.4% jump for August on the back not only of higher car production but also of strengthening production in high-tech industries. The British Retail Consortium was also upbeat, showing a rise in sales of 5.7% compared with a year earlier. There was also some evidence of an increase in advertising, suggesting some revival in longer-term optimism.

All of this makes it very difficult to gauge future trends and to plan accordingly. While there may be an overriding urge to batten down the hatches this is obviously a short-term measure and will do nothing for growth or for bolstering market position.

After all there are many good things going for industry. Commodity prices and business’s input costs are falling. Investment sentiment may be low but equally, this is a good time to borrow money for new equipment and training.

But clearly this is not yet enough and there are those who say that interest rate cuts, along with capital allowances, can only do so much to stir companies into action.

They say that prospects – and the perception of prospects – are the main keys to investment. The BBC’s Ian Fletcher is one such believer: ‘Interest rates don’t have as much impact as the outlook for business does. Similarly, capital allowances help cash flow rather than stimulate spending.’

Caution will be more the norm lower down the supply chain than among the innovators. After all, if everyone always waited to see what everyone else thought and did, the economy would be in constant inertia.

And caution does not prevent companies boosting their firepower through new equipment usage. Leasing is on the up and is likely to expand from large-ticket equipment to cheaper items.

The role of consumers is, of course, critical. The US and UK governments are hoping that consumers, with low borrowing rates, will help spend us all out of slowdown and recession. And indeed levels of consumer debt and remortgaging – along with high-street sales figures – show shoppers carrying on regardless.

Although the current ‘war on terrorism’ is compounding the feeling of economic gloom, many economists believe that the present problems and outlook do not resemble those prevailing during the last significant recession in 1990. Today’s slowdown is far more likely to be short-lived and a bounce-back more easily achieved, they say.

If that proves to be the case then businesses which have only sought to wield the axe without projecting further ahead may find themselves caught unawares by recovery, and unable to take advantage of an upturn.

Christine Buckley is industrial editor of The Times