Analysis: rocky road ahead

British manufacturing has enjoyed a revival in recent years, but can it weather the gathering economic storms?

Last year was a particularly good one for JCB, the privately owned British firm whose name has long been synonymous with diggers. With sales up 31 per cent and pre-tax profits rising by 25 per cent, 2007 was the most successful in its 62-year history.

By the beginning of last month the company was saying it expected this year to be difficult, but chairman Sir Anthony Bamford, son of founder Joseph Cyril Bamford, added: "The outlook for the remainder of 2008 does look challenging but I believe we are well placed to adapt to these difficult conditions."

What a difference a few weeks can make in a rocky economic climate. JCB announced in mid-July that it would be shedding 650 jobs across the UK because of a rapid decline in orders that had led to a 20 per cent fall in the forecast production schedule for 2008.

JCB is particularly vulnerable to the slump in the housing market, but its recent history raises the question of just how well UK manufacturing can weather the gathering economic storms.

A few months ago the signs were more optimistic. UK industry had by then enjoyed a three-year run of monthly growth in production, and there was hope that it could prove to be resilient - as long as manufacturers could continue to pass on the ever-increasing costs of raw materials to their customers.

But this long-term trend appeared to hit the buffers when, in June, the Chartered Institute of Purchasing and Supply reported flat growth for the previous month and pointed out that this was the emerging picture across a range of manufacturing sectors.

The British Chambers of Commerce monitors large and small business across the country. Its director general, David Frost, points to what he sees as a new crisis of confidence across the sectors. "There is a real risk of recession in coming months as the economy absorbs the effects of higher oil and food prices," he says. "If these trends continue the UK business sector is now only one quarter away from technical recession."

So is the honeymoon over for UK manufacturing? And, if so, will this threaten the resurgence that industry has enjoyed in recent years, a time when it appeared to be rising out of the ashes of near-extinction in the 1980s and 1990s? Employers' groups and economists in recent years have looked optimistically on the sector's ability to recast itself as a high-value service provider that can become the brains behind many of the designs and inventions that end up being made cheaply in Asia.

EEF, the engineering employers' body, says it remains convinced that the UK can remain resilient. "The sector is dependent on export markets that are still growing strongly, such as the BRIC nations [Brazil, Russia, India and China]," says spokesman Mark Swift.

"We don't dispute there's likely to be a slowing in growth, and the next 12 months could be very tough," he adds, "but it's a high-value sector and we need to promote the importance of this. Otherwise we end up with a self-fulfilling prophesy of gloom and doom."

To underline the point, EEF has just released a new study of the sector with consultants BDO Stoy Hayward. "Large parts of the manufacturing industry in the UK are not only defying the current economic slowdown, but outperforming the rest of the economy and growing at breakneck speed," according to BDO.

BDO says the findings also add weight to evidence that manufacturers are reaping the benefits of growing world trade by adopting a range of strategies for success, such as innovations in processes, design and services.

"What is especially notable is the diversity of activities that are thriving," says EEF chairman Martin Temple. "Alongside the well-known success stories of aerospace and pharmaceuticals are sectors producing scientific instruments, mechanical appliances and basic metals, which also have shown strong growth and have a solid international reputation."

However, when it comes to the harsh realities of an economic downturn - possibly sinking into recession by next year - manufacturers will need to maintain a strong level of orders to cope. And this will prove increasingly difficult if they are no longer able to pass on to their customers the impact of rising fuel and materials costs.

The latest economic data are certainly sounding alarm bells. According to the UK Office for National Statistics, 'factory gate inflation' (the rise in prices of goods leaving factories) for the year to June hit double digits for the first time since comparable records began in 1986. The 10 per cent rise came alongside a record 30 per cent jump in manufacturers' costs for the same period.

At the same time, soaring food and petrol prices pushed the Consumer Prices Index of annual inflation to 3.8 per cent in June - the highest since January 1997 and almost double the Bank of England's 2 per cent target. So manufacturers should not expect the Bank to make further cuts in interest rates any time soon.

These factors will, of course, also hit factory workers' pay packets. In May, pay deals in manufacturing firms fell for the third month in a row to their lowest level in more than 18 months - a downward trend that is set to continue.

In two key manufacturing sectors, aerospace and automotive, the prospects appear to be at best mixed. The recent 2008 Farnborough Air Show was a less gloomy affair than was predicted, with large and small companies able to report new orders and growth plans. But Ian Godden, chief executive of the Society of British Aerospace Companies, concedes that the sector is likely to see a slowdown in demand.

"There's a definite shift towards a more cautious outlook for the industry," he says. But he adds that the impact of the current global economic turbulence will be less than it would have been 20 years ago. "Because of the nature of current pressures, particularly from oil [prices] and the environment, there's a huge requirement for airlines and the travelling public to receive much better aircraft than historically, and therefore there has been an investment at a level we haven't seen before."

Rolls-Royce, a global aerospace leader, could be seen as an example of the type of company whose wide range of activities - which also include marine and energy businesses - mean that it is likely to be more resilient to a recession this time round compared with the late 1980s.

In the automotive sector, though, the picture is more stark. Sales of new cars in the UK last month fell at their sharpest rate this year. Unsurprisingly, gas-guzzlers were particularly badly hit. Which, says the sector, presents new opportunities for companies to develop more efficient vehicles, and there are plenty of signs of innovation in this area. Certainly the Japanese auto makers with major plants in Britain - Toyota, Honda and Nissan - appear to have no plans to scale back.

As the UK government conducts its manufacturing 'roadshow' in different regions this summer to take the pulse of the sector, it will understandably want to play up rather than talk down industry's prospects, but it may find that the patient is running a temperature that will get worse before it gets better

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