|
Click on the cover to read the latest issue of PSB
Affiliate Links
|
Recession finally impacting engineering sector?31 October 2008The Confederation of British Industry (CBI) has published the results of its latest quarterly Industrial Trends survey. With the current economic climate being what it is, the survey has thrown up some rather turbulent results not in line with the usual trends and expectations. Still, today’s situation isn’t quite as dire as had initially been feared after the last survey, and yet the forecast continues to be overwhelmingly negative. PSB was invited to the CBI’s HQ to find out more, with particular regard to how this affects the engineering industry. The forecast was resoundingly clear – the recession will be deeper and will last longer than initially feared.
It seems as though the crisis in the financial sector may finally have an impact on industry. For example, mechanical engineering, despite bucking the trend by achieving ten consecutive quarters of growth, finally saw a decline in the three months to October. Unfortunately, this trend is set to intensify over the coming months, with further falls in output expected. To compound matters, total new orders have also turned markedly negative (following two years of uninterrupted order growth) despite expectations that they would remain stable. Average unit costs continue to rise, albeit at a more gradual pace than during the previous survey period. Domestic price inflation appears to have peaked in July, and optimism regarding the general business situation continued to decline.
Not particularly enjoyable reading by any stretch of the imagination, but on the plus side – if indeed, there is one – job cuts have not been as severe as the CBI had anticipated in its previous survey. However, the majority of the 515 manufacturing firms surveyed still believe that these job cuts would still ultimately have to be enforced at some stage down the line. The media’s presentation of the current economic climate undoubtedly influences these views, but it would be naïve to anticipate otherwise. The situation was summed up in stark terms by John Cridland:
“The die is now cast for a deeper recession than had been anticipated, and there is little that the government can do. We now have to roll with the punches”.
Honest, if not particularly encouraging words from The CBI’s deputy director-general.
Here are the findings of the CBI’s latest survey, in some detail:
Orders for UK made goods have fallen at their fastest rate since 1999, as both domestic and overseas orders are hit by the global economic slowdown. The company’s latest quarterly Industrial Trends survey shows that declining demand for manufactured goods, coupled with a sharp fall in output, has resulted in the sharpest single quarter fall in manufacturing confidence for 28 years.
In the last three months, 16% of manufacturers reported a rise in new orders while 46% said they had fallen. The resulting balance of -30% signalled the fastest quarterly fall in total new orders since January 1999. Much of this was driven by weak domestic demand. A balance of -38% of firms reported falling domestic orders, the sharpest fall since January 1992.
But export orders, which in previous surveys had been supported by the depreciation of Sterling, also fell (a balance of -19%) as the global economic slowdown suppressed demand.
Firms’ perceptions of their total order book levels deteriorated over the quarter with a balance of -39% reporting levels below normal, the lowest since October 2003.
Manufacturing output fell at the fastest rate in ten years, with a balance of -29% of firms recording a drop in the last three months. Manufacturers see no let-up in the coming quarter with output (-31%), domestic orders (-42%) and export orders (-21%) all expected to fall further.
Falling orders and output appear to be weighing heavily on manufacturers’ sentiment. 4% were more optimistic about the general business situation than three months earlier against 64% who were less so. The resulting balance of -60% represents the fastest fall in confidence since July 1980.
The survey reveals that more difficult lending conditions following the global credit squeeze are acting as a brake on manufacturers’ investment plans. The balances of respondents planning to reduce capital spending on buildings and machinery over the next twelve months are the highest since the early 1980s.
16% of firms cited the availability of external finance as a constraint on investment, well above the 4% recorded in July and the highest figure since the question was first asked in 1979. The cost of finance is also increasingly seen as a constraint, cited by 8% in the past three months, up from 5% previously. However, firms increasingly view uncertainty about future demand as the most important factor curtailing investment plans (58% is the highest level recorded since July 2003).
Some 9% of firms said their output was likely to be constrained by credit or finance in the coming quarter, the highest figure since 1975.
The number of job losses during the quarter was not as steep as firms had predicted in the previous quarterly survey, with a balance of -15% cutting staff. However, more jobs are expected to go in the next three months with a balance of -33% predicting they will reduce employment. Based on the survey results, the CBI forecasts 23,000 manufacturing jobs will be lost in the third quarter, rising to 42,000 in the fourth quarter.
Price pressures have softened over the last quarter, and are expected to ease further in the face of slower growth in unit costs and weaker demand. Domestic price inflation eased (a balance of +21% down from +27% in July) and is expected to fall back even more sharply over the next quarter (a balance of +10%). Meanwhile export price inflation in the three months to October was, with a balance of +19%, similar to that of earlier in the year, but is expected to slow slightly in the next three months (balance of +14%).
Ian McCafferty, the CBI’s chief economic adviser, said: “This survey was conducted during a period of exceptional economic turbulence, so it is unsurprising that confidence has taken such a hit. However, the sharp falls in orders and output show that the slowdown in the UK economy is now spreading to sectors previously resilient to the weakness in the banking and housing markets.
“It is also of serious concern that constraints on capital now appear to be affecting manufacturers, in a way that had not been the case earlier. We can but hope that the re-capitalisation of banks and the cut in interest rates, which took place just as the survey closed, will prevent a further credit squeeze over the winter.” Contact Details and Archive...Most Viewed Articles... |
|