Evidence stacks up of manufacturing’s woes

Four independent surveys published within the last week all highlight the increasingly severe risk of the UK manufacturing sector sliding into recession. And a fifth survey shows that while industry is cutting back, skills shortages mean hard-won orders can prove difficult to meet. The Engineering Employers’ Federation’s second quarter Business Trends survey warns that the […]

Four independent surveys published within the last week all highlight the increasingly severe risk of the UK manufacturing sector sliding into recession. And a fifth survey shows that while industry is cutting back, skills shortages mean hard-won orders can prove difficult to meet.

The Engineering Employers’ Federation’s second quarter Business Trends survey warns that the UK engineering industry is moving towards recession. The survey of more than 1,600 UK businesses says every indicator is at its lowest level since the survey began in 1994.

The most worrying trend is that domestic demand is starting to buckle. In recent months, UK orders were compensating for declining export sales from most British engineering companies. While export orders continue to fall for the sixth successive quarter (with the rate of decline speeding up this year), there is an even faster decline in UK demand.

This fall-off is believed to be the lagged effect of lower export orders, as UK suppliers to British exporters see the knock-on effect of less overall business being won from abroad. This will depress future UK orders.

The EEF says the decline in output reflects the loss of international competitiveness experienced over the past two years due to the high pound. More recent slow-downs in UK output are also expected to filter through into demand for engineering products. ‘This can only deepen the downward trend already established,’ the report says.

The EEF’s findings are reinforced by the latest monthly survey from the Chartered Institute of Purchasing and Supply, which reports that manufactured goods orders are falling faster than at any time since November 1995. It also points to the inflows of cheaper goods from abroad aided by the high value of sterling as further depressing UK manufacturing. Cheap imports from Asia look set to increase as a result of the Asian economic crisis.

The bad news does not stop there. Britain is being pushed ‘uncomfortably close to stagnation’ according to economic consultants at the Centre for Economics and Business Research, which reports that the slowing world economy will compound the difficulties of the manufacturing sector. The CEBR expects the manufacturing sector to record a 0.7% decline in output this year, recovering to 2% growth next year. The economy as a whole is expected to grow at 1.6% in 1998, only half the rate of 1997.

Lloyds Bank also reports this week on a survey which shows confidence among 2,000 UK companies has fallen to the lowest point since the recession in the early 1990s. It says this is starting to spill over into the services sector, where in some cases orders are starting to slow.

This could be an optimistic development. Any signs that the economy as a whole is slowing down will make further rises in interest rates less likely.

Bank of England Governor Eddie George, who chairs the Monetary Policy Committee, said a month ago that the UK economy was ‘close to overheating’, hence the quarter-point interest rate hike imposed in June.

That situation may be changing, though there are still plenty of figures to suggest that inflationary pressures remain. The CEBR forecasts an average rate of inflation in 1998 of 3.25% higher than the 2.5% target set by Gordon Brown. Average earnings are forecast to rise at 5% this year, fuelling inflation.

The same cannot be said for earnings in engineering. Pay settlements have remained at around 3.5%, despite a worsening skills shortage throughout the industry.

This week the Engineering and Marine Training Authority published its 1998 labour market survey of the engineering industry in Britain, which showed one in two of the 4,200 engineering sites surveyed had found difficulties recruiting. Craft vacancies proved the hardest to fill, and experienced operators among the scarcest skilled staff on the market.

Smaller firms are worst hit, as workers leave to join larger companies with better pay and benefits.

The problem dates back to a lack of investment in training 10 years ago, but is likely to intensify when the manufacturing sector eventually turns the corner. When the business cycle starts its next upswing and orders pick up, manufacturers could face a new set of problems. They may have plenty of orders, only to find they cannot deliver.