UK manufacturers have rejected calls from economists for intervention to lower the pound, even though the worsening export market is prompting firms to cut thousands of jobs.
The Ernst & Young Independent Treasury Economic Model Club’s forecast, published this week, recommended that the Bank of England, the US Federal Reserve and the European Central Bank buy euros and sell sterling, but business is sceptical.
While industrialists would like the pound to fall against the euro, they believe this strategy is too risky. Tony Reynolds, finance director for manufacturer Elfab, said: ‘If they devalue we might see some net gain for us, but I am not convinced it would help. It might depress domestic consumption and devaluation sends bad signals to the markets, even if it is for good reasons.’
Stephen Radley, chief economist at the Engineering Employers Federation, had doubts about the plan because it would not solve the problem of a weak pound against the dollar, which is pushing up raw material prices.
‘Unless the US changes its strong dollar policy and the markets downgrade the dollar it’s hard to see the pound strengthening,’ he told The Engineer.
Neither is the Bank of England about to intervene in the markets. Its spokesman said that the Bank does not comment on such operational issues. But the published minutes of the Monetary Policy Committee, which decides interest rate levels, shows it discussed intervention at its February 2000 meeting. It concluded that such a move could fail to make any difference and that failure could damage the credibility of the Bank.
Any intervention would come too late for the thousands of workers who are to be made redundant by two large European industrial companies. Invensys, the UK engineering group, said this week it is to shed a total of 6,000 from its workforce by the end of the year. Chief executive Allen Yurko is to step down after the company was hit by falling foreign orders.
Cuts in the UK
ABB, the electrical engineering group which, like Invensys, is considered to be a bellwether of market demand, said it is to cut 12,000 jobs, 7% of its workforce.
Some of the cuts are expected to fall in the UK, where ABB employs 8,000 people. The US telecoms manufacturer Lucent Technologies, which also has a UK production facility, said it is to cut 20,000 posts worldwide.
Smaller manufacturers in more traditional sectors such as Luxfer Gas Cylinders and Henley Foundries in the West Midlands are also cutting jobs because of a fall in export orders.
The cuts are unlikely to end there as official figures for engineering orders and turnover and the CBI’s quarterly industrial trends survey results have both highlighted a marked decline in demand.
The CBI survey found that domestic orders fell in line with expectations while export orders had fallen far more sharply over the past four months. Manufacturing output also fell at the fastest rate since July 1999 and the number of firms working below capacity rose to the highest level since January 1993.
The decline will continue, according to the ITEM Club, unless the exchange rate moves in the right direction for exports. Its forecast describes two possible futures for the UK. One has a pound that is stubbornly strong and the recession in manufacturing spreads and engulfs the entire economy. The other has the pound gradually declining against the euro over the next three years by 12% – with a small rise in interest rates. The report’s view is that sterling is overvalued by 10-15%.
Professor Peter Spencer, Ernst & Young ITEM Club’s economic adviser, told The Engineer that the markets were not moving and needed intervention.
‘We are less confident that the markets will come to their senses. If they continue to defy gravity the Bank of England should intervene. We have been predicting a slide for a year and it still has not happened.’
The UK’s plight may be due to it being squeezed between the two huge economic blocs of the euro and the dollar. This harsh international environment has already led to a first quarter fall of 3% in UK investment. The ITEM report said: ‘Ominously the fall was almost entirely due to a collapse in spending on vehicles – usually the first thing that corporations cut back in a crisis.’