Manufacturing exporters are facing up to a ‘love-hate’ relationship with their euro-zone customers, with orders improving over the last year, but at the cost of severe cuts in margins and profitability, the Engineering Employers Federation reported this week.
A pick-up in European economic growth has proved healthy for UK exporters, despite the strength of sterling in this market, with a small trade surplus recorded in the region last year.
According to the EEF’s Business Trends Survey, published on Tuesday, companies exporting to the EU are enjoying the biggest growth in export orders, though many of those with the greatest exposure to EU markets are facing a tough squeeze on margins.
The survey findings are borne out by official data on corporate productivity. They show the euro problem has triggered a sharp fall in net rates of return. Returns fell from 13.2% at the start of 1998 to just 6% by the middle of last year.
‘As companies seek to offset the downward pressure on margins by improving productivity, jobs continue to be cut and are forecast to decline again this year,’ the survey reports. It says investment intentions are negative, and productivity gains came from companies shedding jobs.
Smaller exporters have been struggling most, the survey shows. Over the last quarter of 2000 export orders only grew for firms with more than 200 employees. Despite this, the EEF predicts that a strengthening euro and an all-round improvement in world trade looks set to keep manufacturing exports buoyant in 2001, with a 7% growth in exports, less than the 10% growth last year.
Stephen Radley, chief economist at the EEF, said the short- term outlook for engineering was upbeat, but it would only be sustained if investment increased.Speaking before this week’s interest rate decision, he said the government could encourage investment through carefully targeted tax incentives for industry, and that by avoiding over-generous tax cuts it would be difficult for the Bank of England’s Monetary Policy Committee to cut interest rates.