Trouble at t’mill

How will manufacturers fare against inflation and the credit crunch, and how can they defend themselves? Keep the banks at bay and steer clear of the housing sector, advises Peter Hoskin

The media has focused its attention on the financial sector since the credit crisis took hold at the tail end of last year, and rightly so. After all, that’s where the problem started, and that’s where the majority of its effects have been felt. But with the economy so deep in the doldrums, problems must soon spread to other areas.

So what exactly is the state of British manufacturing? It’s hardly a rosy spectacle. By almost any indicator, the sector has been in terminal decline for decades. The number of workers in the manufacturing sector stood at around seven million in 1978, compared to around three million now. In the early 1990s, manufacturing investment represented 22 per cent of all investment in the UK; now that figure is just over 10 per cent. And manufacturing output fell from 23 per cent of GDP to 15 per cent over the same period.

Much of this decline can be attributed to globalisation and trade liberalisation, which have left the UK exposed to the manufactured goods produced in low-wage, low-tax economies, such as China and India. ‘Why pay more, when you get it cheaper from overseas?’ is the sentiment shared by consumers and companies alike, and it has prompted many manufacturers to leave Britain behind altogether. The void has been filled by the rise and rise of the UK services sector, the driving force of economic growth over the past ten years. As Tim Congdon of Lombard Street Research explains: ‘Britain is a rich country – we don’t want to do repetitive things with our hands. We should do unique and specialist tasks requiring the use of our brains.’

If manufacturing was already looking anaemic before the credit crunch swept into town, how is it coping now and what are its prospects? David Frost, director-general of the British Chambers of Commerce, spends much of his time travelling the country speaking to manufacturers – and his dispatches from the front line are surprisingly upbeat. The credit crisis, he says, has thus far had ‘no major impact upon manufacturers’. That is to say, any impact has been slight and indirect. One example – detailed by Bill Jamieson last month – is that banks are becoming far more reluctant to lend money to manufacturing clients. In practice, this means that banks are seeking to renegotiate the terms of the overdrafts that manufacturers hold with them, to make them more stringent. But the banks can’t lean too hard: Frost says that the banks can’t concoct terms that will scare their clients away, or they risk coming out of the crunch with a severely reduced customer base, as well as a damaged reputation. Sensing they have the upper hand in this, many manufacturers are refusing the banks’ stricter terms. Whether banks will roll over so easily if the crunch hardens remains to be seen.

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