Confidence wanes as manufacturing fragility worsens
BUSINESS confidence has declined across the West Midlands as fragility in the manufacturing sector worsens, new data suggests today.
Business in the region – and the rest of the UK – now expects little economic growth over the next six months, according to the latest Business Trends report by accountants and advisors BDO.
The manufacturing output index – a measure of orders on hand and a guide to manufacturing growth one quarter ahead – has fallen to 93.9, below the 95 level which indicates contraction of the industry, and the lowest since October 2009 when the economy was tentatively emerging from recession.
The manufacturing optimism index – which reflects how businesspeople expect trade to develop over the next six months – has now stayed below the 95 level for two months, suggesting that manufacturing will remain mired in recessionary conditions past the turn of the year.
However, one bright spot for manufacturing employers is that wages continue to remain firmly under control, with year-on-year pay growth between March and May 2011 at 1%, compared with 2.1% across all sectors.
The services sector, while not declining like the manufacturing sector, has been hovering around 95 for both optimism (95.5) and output (95.3) for over a year. This points to zero growth in the sector for the rest of 2011.
Tom Lawton, Birmingham based partner and head of manufacturing at BDO, said: “As our data has suggested for some time, the UK’s economic recovery continues to falter. The rapid decline of the manufacturing sector, championed as the key to a rebalancing of the UK economy, is alarming. And the services sector is showing little sign of picking up the slack.”
The economy’s problems are compounded by inflation; this month the BDO inflation index reached a 35-month high. Moreover, these inflationary pressures show little sign of decreasing, as double-digit price increases for electricity and gas, due to take effect in September, are likely to aggravate the situation.
The latest inflation figures are expected later this week and are expected to remain around the 4.2% level – well above the Bank of England’s 2% target. Earlier this month the Bank revised its growth predictions downwards and governor Sir Mervyn King said he expected inflation to hit 5% by the end of the year.
“The Government faced some very difficult choices when it came to office and its decision to give public borrowing first priority may well have preserved the UK from getting embroiled in its very own sovereign debt crisis,” added Mr Lawton.
“Unfortunately, a key side effect of this policy was that business confidence plummeted last year and has remained low ever since. Manufacturing was one of the few bright spots, but this is now in a contractionary phase.
“One can’t pretend that it’s easy to see what the government should do next, but we should not forget that continued low growth is as substantial a medium term threat to the UK’s credit worthiness as continued high borrowing is in the short term.”
