UK trade gap widens as industry takes pounding

Hopes for renewed industrial growth look set to wilt during a long, hot summer for manufacturing, according to a batch of surveys to be published in the coming weeks.

The results of research carried out in the West Midlands for the British Chamber of Commerce quarterly survey, to be published in advance of next month’s interest rate decision, show sales and orders falling in both domestic and foreign markets – and business confidence slumping.

The findings also support the expected outcomes of studies conducted by the Engineering Employers Federation and the Machine Tool Technologies Association, both to be published in the next two weeks.

Summer of discontent

Louise Beard of the Birmingham Chamber of Commerce which carried out the survey that will contribute to the BCC report, said industry is facing a struggle in the coming months.

‘The exchange rate and competition from the continent are the problems. Companies insist that they are now as productive as those on the continent and have driven down costs.’

This claim is supported by the latest official trade figures. In the last quarter, the rise in exports went primarily to Europe, while the increase in imports came from the US, Japan, South Africa and Taiwan. The figures show the trade deficit continuing to grow.

Export conditions have deteriorated further in the past two weeks with the pound rising steadily against the dollar, reaching $1.42 on Wednesday. It was also up against the euro at e1.64.

Tony Sweeten, chief executive of machine tool supplier 600 Group said the government must act soon to help his sector, which is troubled by the exchange rate.’The Machine Tool Technologies Association has prepared a forecast which will be made public in the next week or so, predicting a tough summer. The government needs to say something now about how it will help.’

Sweeten’s view is likely to be reinforced when the EEF’squarterly Engineering Outlook survey comes out on Tuesday. This is expected to show a significant drop in orders compared with the previous two quarters.

The EEF’s results come as no surprise to safety products manufacturer Elfab’s chief executive Tony Reynolds. He is disillusioned with UK manufacturing’s domestic prospects. ‘We accept we’re the industry nobody cares about any more. Engineering does not expect to get any help from anyone. Things will never get easy in the UK.’

As if the exchange rate and foreign competition were not enough to contend with, the Birmingham Chamber of Commerce survey also indicates a fear among business leaders of rising interest rates: ‘[There is a] feeling that interest rates are likely tobe raised again in an attempt to dampen consumer demand and offset high public spending.’

The feeling that further interest rate decisions will be made with only the service sector in mind is turning manufacturers against the government. Paul Webb, chief executive of plastic components manufacturer, Webgrove Holdings, is despondent. ‘The government doesn’t give a damn about manufacturing. Conditions are extremely difficult, given cost-down pressures and the strength of the pound.’

Paradoxically, however, the high pound could, itself, contribute to a run on sterling, resulting in eventual devaluation. According to financial adviser Graham Bishop’s briefing on the chancellor’s Mansion House speech, the UK could be heading for a repeat of 1992’s Black Wednesday, which saw sterling forced out of the ERM.

A run on the pound?

Due, in some measure, to the high pound, Britain’s trade deficit is now larger than it was in 1992. And investment firm Schroder Salomon Smith Barney predicts it will rise to 4% of GDP in 2002.

Bishop said the high level of imports now means there is a vast amount of money flowing out of the UK, and much less flowing back in from exports. This creates uncertainty in the mind of the markets and the question is: when will they decide the situation is unsustainable and sell sterling big-time? Bishop thinks that that time could now come within 18 months.

Some in UK manufacturing are beginning to think of such a violent re-adjustment as their only hope.