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Danger signs for UK manufacturing

19 July 2010

British manufacturing is on the slide and faces further steep decline unless there are serious efforts to improve its image and bring fresh blood into its mainstream, says a report

The report was published in The Independent and was in response to the global index published by Deloitte, which indicates that by 2015, British manufacturing will have slid to a woeful 20th position in the world competitiveness rankings, and have been leapfrogged by Russia, Spain and South Africa.

The table remains dominated by the so-called Asian 'tiger' nations. For instance, China will maintain its position at the top of the league, while India and South Korea will retain their respective second and third places.

As The Independent points out, British manufacturing is already less competitive than Switzerland and The Netherlands and faces a far more torrid time in the near future. ''British manufacturing is high-end, high-skilled and high-tech,'' David Raistrick, UK manufacturing leader at Deloitte said. ''But is less competitive than it was and is set to fall further.''

So what are the reasons the UK is struggling to retain a manufacturing base in the face of pressure from low paid Asian competitors? According to The Independent, these include high labour costs, coupled with restrictive energy policies and environmental regulations.

But Raistrick said the continued presence of the US and Germany in the global top 10 point to a subtle analysis of where Britain is going wrong. ''The reality is that labour costs are only the second most important factor in determining manufacturing competitiveness. The most important thing of all is the availability of talented engineers, scientists and researchers.''

But the news isn't all bad. It was revealed today that the manufacturing sector saw output rise at the fastest rate in 15 years in the three months to July, as demand for UK-made goods continued to strengthen and firms rebuilt their stocks. But the CBI, the UK’s leading business group said the pace of manufacturing growth is expected to be slower in the coming quarter.

Of the 439 manufacturers that responded to the Quarterly Industrial Trends Survey, 38% said output rose during the last quarter, while 15% said it fell. The resulting rounded balance of +24% is the fastest growth since April 1995 (+26%), and a marked improvement on the previous quarter’s flat performance (+1%).

A strong rise in home-grown orders helped boost output. 29% of firms said the volume of domestic orders rose and 19% said they fell, giving a balance of +10%, the strongest since April 2004 (+12%). Overseas demand was buoyant with 28% of firms reporting a rise in export order volumes, and 11% a decline, giving a rounded balance +18%.

As a result, the volume of total new orders, which reflects combined domestic and overseas orders, rose (+18%). The rise in output was also driven by a shift in the stock cycle, which saw firms building up inventories of raw materials and finished goods.

Looking ahead to the next three months, manufacturing output is expected to rise again, although at a slower pace (+6%), as growth in domestic and export orders is expected to moderate. The balances for expected domestic and export orders are +4% and -3% respectively.

Ian McCafferty, the CBI’s Chief Economic Adviser, said: “With demand for UK-made goods at home and abroad having strengthened, manufacturing production really stepped up a gear during the past three months. Output was also boosted by firms taking action to rebuild stocks.

“Looking ahead, production is expected to rise further, but at a more moderate rate. In our view the risk of a double-dip recession remains low and the fortunes of the manufacturing sector are continuing to slowly and steadily improve.

“It is particularly encouraging that credit constraints are continuing to ease, and confidence about business and export prospects has risen for the fourth successive quarter.”

Sentiment about the overall business situation and export prospects are continuing to improve with a balance of 10% more optimistic than three months ago.

While costs rose sharply last quarter, their rate of growth is expected to ease. A balance of 25% of firms reported average unit costs rising, the fastest rise since October 2008 (+56%). A balance of +6% said domestic prices increased during the quarter, the first rise in prices since October 2008 (+21%). In the coming quarter, a balance of +12% expect average unit costs to rise and +5% anticipate a rise in domestic prices.

Access to credit and finance appears to be improving with the percentage of firms citing it as a constraint to output and export orders having fallen to pre-recession levels.

Employment has stabilised (-2%) and firms expect staff numbers to remain unchanged in the coming quarter (-2%).

Capacity use is normalising, with 88% of firms saying they have adequate capacity to meet demand, and a third planning to invest to increase capacity. However, overall investment intentions remain weak, with spending on buildings expected to fall (-11) in the year ahead, while firms report little change (+2%) in expenditure plans for plant and machinery.

The CBI also announced that its quarterly Industrial Trends Survey has been reclassified and re-weighted to bring the data in line with the latest UK and European Commission official classification systems. This permits easy comparison with other economic indicators. In nearly all cases at the aggregate headline level, the changes in the results generated under the new system are statistically insignificant from those under the previous weighting and classification.

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