Revealing the results of his organisation’s latest quarterly Industrial Trends survey last Thursday, the CBI’s chief economic advisor, Ian McCafferty said there was every reason to be encouraged by this latest set of figures. After nearly two full years of falling output, manufacturers are beginning to see a return to modest growth, thanks in part to improved overseas demand and much slower stock reductions.
“It is encouraging that the weaker pound is now providing firms with some respite as global demand improves,” Mr McCafferty said. “Exports are rising for the first time in two years, as UK-made goods are looking more attractive in overseas markets. Manufacturers are also feeling upbeat about export prospects for the year ahead.”
But he did strike a note of caution, saying that the manufacturing sector was not exactly out of the woods yet. With domestic demand still weak, and the availability of credit remaining a real headache for some companies, firms are only expecting modest growth at best over the next quarter. “This underlines our view that the UK’s economic recovery will be slow and protracted,” he warns.
Nonetheless, manufacturing production rose for the first time in two years, according to the survey, which revealed a stronger than expected rise in output in the three months to January. The pace of de-stocking has slowed for all types of inventory, from raw materials to finished goods, and stocks are now better aligned with demand. There was a particularly pronounced increase in consumer goods production during the quarter to January 2010 – the strongest in twenty years.
The current survey shows that investment intentions for the year ahead appear to be stabilising. The key targets appear to be personnel and intellectual property, with firms planning to spend more on training and retraining (+11%) and on innovation (+15%). However, only a very small upward movement in spending is forecast for the plant and machinery sector (+1%). The availability of finance remains a concern, and is cited by 13% of firms as a factor likely to limit output, and by 12% as likely to limit export orders.
Despite this, export orders rose for the first time since January 2008, boosted by the relative weakness of Sterling and improving global demand. Nearly a third of firms surveyed (30%) said exports grew during the quarter, while 24% reported a fall, giving a balance of +6%. Exports are expected to grow more strongly in the next quarter, and export optimism among firms (particularly those in the intermediate goods sector) is at its highest since the summer of 1995.
In line with the recent Office of National Statistics figures on UK unemployment, which confounded the pessimistic forecasts of last year, the rate of job shedding in manufacturing eased noticeably more than had been expected, according to the survey results. The CBI is confident that this welcome trend will continue over the coming months, but warns of the fragility of recovery. The risks are real and present, not least being our current reliance on export demand, the instability of world commodity prices and the political uncertainty surrounding an imminent General Election.
The optimistic notes of the CBI’s latest quarterly survey are echoed in other reports published last week by the business information and credit ratings agencies, Experian and Equifax. According to the latest Insolvency Index from Experian, the financial health of businesses in the UK saw a significant improvement in 2009, while the annual rate of business insolvencies increased at a slower rate compared with that of 2008.
The average financial strength score for businesses in Great Britain improved steadily throughout 2009 – rising from 79.46 in January 2009 to 81.37 in December 2009. Experian says this has been helped by an overall improvement in the time it takes businesses to pay their suppliers. Total insolvencies increased by only 12.0% during 2009, compared with the 29.3% increase during 2008, bringing the annual insolvency rate for 2009 to 1.25%. The highest insolvency rates in 2009 were among mid-sized businesses.
Meanwhile, in its Business Failures Report for the final quarter of 2009, Equifax claims that the manufacturing sector is starting to turn the corner, with failures down 3.9%. From the middle of 2009 onwards, it says, evidence showed that the rate of failures among businesses was slowing down. The figures for the last quarter show a continuation of this trend with a 7.7% year-on-year decrease for the UK as a whole.
Equifax’s Neil Munroe says the manufacturing sector is definitely starting to turn the corner with the reported 3.9% decrease in business failures, but the star of the show is the retail sector, which showed the strongest turnaround in the fourth quarter with a 20.9% drop in failures year-on-year. This widespread decrease has to be good news for the economy as a whole, he says.
These figures are, of course, relative; comparing 2009 with 2007, there was an overall 39.5% increase in business failures, so w have some way to go. As Mr McCafferty cautioned on Thursday, Mr Munroe also says that we are not out of the woods yet. But like Mr McCafferty, Mr Munroe believes there is room for a little optimism and says businesses across the UK and across every sector should take real encouragement from his company’s latest report.
Les Hunt
Editor