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A strong performance, but is credit still too tight?

04 August 2010

Last week, both the Confederation of British Industry (CBI) and the Engineering Employers’ Federation (EEF) reported a welcome uplift in the performance of the UK’s manufacturing sector, but tempered their announcements with a cautionary note on its sustainability in the face of global economic uncertainty.

The CBI’s latest quarterly SME Trends Survey saw the fastest growth in output for the SME sector in almost fifteen years, a result largely attributed to renewed stock-building across the supply chain. Meanwhile, the EEF’s Economics Prospects 2010 report, which it compiles for the wider manufacturing sector in partnership with accountancy firm BDO, forecasts 3.8% growth this year and 3.4% next, outstripping the economy as a whole.

Russel Griggs, chairman of the CBI’s SME Council, says smaller manufacturers enjoyed a “bumper” quarter, with exports leading the charge, reflecting the pick-up in global trade and the relative weakness of sterling. But firms are still seeing their profit margins squeezed because of rising costs. Looking ahead, firms do not expect such strong growth to be sustained into the coming quarter, and output is expected to dip slightly as demand looks set to weaken.

Likewise, the EEF says that while Britain ’s manufacturers have outperformed expectations in the first half of 2010, they face the prospect of greater global economic uncertainty and financial market volatility for the remainder of 2010. Moreover, overall growth for manufacturing will mask sharply diverging performance of individual sectors, the EEF claims, with some enjoying strong growth on the back of weaker sterling and demand from emerging markets and others showing only moderate prospects for this year and beyond given uncertainty in developed markets. EEF chief economist, Lee Hopley, attributes this expected divergence to looming spending cuts here at home and more uncertainty in those key markets.

“Overall, the road to more stable economic conditions is likely to be an uneven one,” he says. “In seeking to rebalance the economy, policymakers face a mixed outlook, especially as investment is set to remain weak for the rest of this year. Manufacturers and the wider economy also face risks and lingering uncertainty. Whilst we have more clarity over the government’s fiscal ambitions, attention is now turning to where the cuts will hit and the difficult balancing act facing the Monetary Policy Committee and when it will make its next move.” BDO’s head of manufacturing, Tom Lawton says there is an underlying nervousness within the sector.

“We still don’t know how the spending cuts announced in the last budget will impact demand for manufactured goods, while a reduction in government support could also hit the UK’s competitiveness in the global marketplace,” he claims. “But manufacturers should remain optimistic. Despite the EU economic slowdown, there are fantastic opportunities for growth in other countries like China and India and we welcome the recent UK trade delegation’s visit. However if the coalition government is to truly enable international growth in new markets, they must work closely with the banking sector to ensure appropriate financing structures and support is in place to enable businesses take advantage of new export opportunities.”

That will certainly strike a chord with business support groups like the Forum of Private Business (FPB), which deplores the decline in small business lending by the banks, following a promising start at the beginning of the year. Matthew Goodman, head of policy at the FPB, says his organisation’s own research shows that both loans and overdrafts have decreased since the start of June – at a time small businesses need more finance in order to expand.

The National Association of Commercial Finance Brokers (NACFB), which is publishing its annual survey covering SME finance later this month, also observed that there had been a significant reversal in the slight improvements to the availability of finance recorded at the start of the year.

However, despite these independent findings by the FPB and NACFB, the CBI’s latest quarterly SME Trends Survey offers a somewhat conflicting story, with concerns among respondents over access to credit easing over the quarter. Just 4% of the 403 firms surveyed cite credit or finance constraints as likely to limit export orders, compared with 12% in the previous quarter. This is now in line with the long-run average, says the CBI. Furthermore, 5% of firms say credit or finance are factors likely to act as a brake on output, also in line with the historic mean. Mr Goodman concedes that, with their need to re-capitalise while keeping up the flow of credit, banks do have their backs against the wall, the way out of this situation isn’t to clamp down on one side to fix the other.

“Businesses need the access to finance and expertise that the banks can provide, and the banks need commercially-viable business customers to grow their reserves, so both groups are going to need to find innovative ways of managing lending in this new economy,” he says. “For the banks, that means a closer relationship with clients, understanding their business customers and their finance requirements. For businesses, it means presenting better quality financial information and just as importantly an awareness of alternative forms of finance.”

Les Hunt

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