Prospects of interest rate rises have increased with forecasts that inflation was likely to remain above the Government’s target rate for most of the next two years. This will do massive damage to beleaguered manufacturers already battling against the affects of high exchange rates caused by the strength of the pound.
The decision by the Bank of England’s Monetary Policy Committee (MPC) to leave interest rates unchanged after their last monthly session was a big blow. It was also disappointing that the MPC did not give an indication that interest rates had peaked. We would liked to have heard the committee say that interest rates would not rise for at least three months. This would have allowed companies to introduce some stability into their planning, thus increasing confidence. At the moment they are on a roller-coaster ride without knowing when or where they can get off.
The MPC’s actions also reaffirmed our view that Chancellor Gordon Brown is shirking his responsibilities. The Government’s decision to hand over control of interest rates to the Bank created some worrying trends for those of us who operate in the industrial heartland of the country. The MPC has raised interest rates five times from 6.5% to 7.5% since the General Election in May last year. The effect has been to raise exchange rates to crippling levels for manufacturers and exporters.
The Birmingham Chamber of Commerce and Industry’s (BCI) pleas for restraint by the MPC initially went unheeded, with four rises in rapid succession. Six months of stability followed, with the rate unchanged at 7.25%. Then came a devastating blow in June, when the MPC unexpectedly decided to increase rates by a further 0.25%.
However, the committee cannot be entirely blamed, for it is merely acting on Government orders to keep inflation at a peak of 2.5%. Despite damning evidence from ourselves and other organisations that manufacturers were finding it impossible to compete abroad, the committee had to pursue the short-termism imposed on it by the Government.
Only a change in Government policy will help manufacturing out of a recession. This should be done by introducing fiscal measures through the Budget, spreading the burden more fairly into the consumer and service sectors. We call for an increase in the dialogue between the Treasury and the Bank of England to produce a more combined approach, using a proper balance of a fiscal and monetary policy.
Few people would argue that high interest rates are not a good mechanism to curb excessive consumer spending. And admittedly, economic indicators have shown a near buoyant economy, record levels of inward investment and a continuing decrease in unemployment.
But while all other sectors retail, service and professional prosper as a result of the strength of the pound abroad, manufacturing is bearing the brunt of economic policy.
The sector can only take so much. The Chancellor may be too late to divert a crisis among manufacturers, many of whom are telling us that short-time working and job losses are a real threat.
Further proof of the damage being done to industry came from a report by accountant and consultant Deloitte & Touche, which recorded 20% more company failures in July than in June, most of them from the manufacturing sector in the Midlands and the north.
Short-term, City-influenced thinking is beginning to cripple manufacturing in the regions. While the City is largely cocooned from the effects of fluctuating (or continually rising) interest rates, it is the small and medium-sized businesses which are suffering.
The results of the latest Quarterly Economic Survey by the BCI show that business confidence in Birmingham had slumped to the lowest levels since the depths of the recession at the start of the 1990s. These figures are a damning indictment of the Government’s monetary policies. Only 42% of the companies surveyed were confident that turnover would improve, compared to 62% at the end of the first quarter of this year. This compares with the 31% recorded in the last quarter of 1992, when the economy was at rock bottom.
The survey also showed that the home market has taken a marked downturn while exports slipped even further.
The figures are much worse than we expected. We had warned that there would be long-term effects as a result of rising interest and exchange rates, but the statistics show that confidence is being killed.
Even more worrying is the prediction from companies which expect to have to decrease their workforce in the next few months. Many will not be able to sustain a workforce that is under-employed through falling orders caused by its inability to compete abroad.
With job losses becoming a daily occurrence, BCI believes it is now time for action beyond the MPC’s remit. It is incumbent on the Government to intervene and prevent the UK’s manufacturing industry from sliding into deeper recession.
Roger Dickens is president of Birmingham Chamber of Commerce and Industry