UK: Manufacturing recovery may prove timely for Lamont.

UK: Manufacturing recovery may prove timely for Lamont. - It could be the manufacturers, not the consumers, who come to the Chancellor's aid, says Roger Eglin.

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Last Updated: 31 Aug 2010

It could be the manufacturers, not the consumers, who come to the Chancellor's aid, says Roger Eglin.

Chancellor of the Exchequer Norman Lamont's predictions that consumers would play a key role in leading the economy out of recession was always a puzzling one. How could consumers be expected, beset as they are by fears about job security, deprived of the cushion of soaring house prices and still paying off debt accumulated in the carefree '80s, turn on the spending tap once again? No. The cavalry is unlikely to come galloping to the rescue from this direction. Instead Mr Lamont appears to have found help coming from the other end of the economic chain - from manufacturing industry itself.

This recession has always been something of a puzzle. Just over a year ago the official line was still a robust denial: recession, what recession? But when it burst, the bubble burst with a vengeance. The construction and property business was knocked sideways. Industries like advertising, the media, even the professions, experienced the chill factor of recession as never before. But while manufacturing was hit, it saw nothing on the scale of the devastation of the late '70s. This time the service industries took the impact.

This is reflected in the geographical impact of the recession. The traditional North-South roles were reversed: for what must be the first time ever, the South-east felt the pain of job losses and company closures that traditionally have been everyday facts of life in other parts of the country. In Wales especially and parts of the North, the effects of the recession on industry has been nowhere as near as bad as in the South-east. Take the motor industry, for example. Though car sales were sliding by late spring, output was running at very high levels. A most unstable combination, it could be argued - but much of the extra output was going for export rather than domestic consumption.

For years a succession of Chancellors have cherished the dream of the economy waking to an export-led recovery. It is by no means conclusive but there are, to crib Lamont's own words, vague stirrings to suggest that, probably more by accident than design, he might have pulled it off. Take, for example, the trade figures for June. So accustomed have we become to poor trade returns that these figures showing record exports, an overall balance and the first manufacturing trade surplus since February 1984 were dismissed as an aberration. As Lex put it in the Financial Times, it all looks too good to last.

Clearly the recession has put a ceiling on imports but the export picture is a bright one. Exports of cars, chemicals and capital equipment look good. More cars are now being produced for export than for home consumption. In volume terms, car exports are now two and a half times the level of 1985. In the second quarter of this year they were up 45% on the previous quarter; over the same period imports were down by 29%.

This is having a remarkable impact on the motor industry's balance of trade. In the first quarter of the year car exports rose by 39% to £962 million while car imports declined 27% to £1.38 billion. Over the quarter the total value of motor industry imports, including cars, commercial vehicles, parts and accessories, was £2.95 billion, a 21% decline, while the value of similar product exports rose by 17% to £2.63 billion.

Thus, says Daiwa Institute of Research in a new motor industry study, the first quarter of this year saw a trade deficit reduced to only £323 million from £1.485 billion in the comparable quarter of 1990. The second quarter saw still more improvement when the trade deficit declined to £276 million, giving a deficit for the first half of the year of only £617 million against a £3 billion deficit for the same period of 1990.

Nissan's Sunderland plant, which exports 80% of its output, played an important part in this revival but Ford, Vauxhall and Rover all increased their overseas sales as well. Vauxhall plans to export 70,000 cars this year compared with only 24,000 last year. Range Rovers are selling well on the continent and in America and the Metro and Rover 216/416 have broken into the European markets. Ford UK has become a primary source of Fiestas for Europe. Preliminary figures suggest that car exports rose by 109.5% in the first seven months of the year.

It is hard to believe that recovery on this scale can be sustained, especially as the European market seems in little better shape than the British. The Society of Motor Manufacturers and Traders predicts that the buying of British cars in Europe will weaken in the latter half, taking the year's trade deficit to some £2 billion. But rising exports and falling imports suggests that while market conditions may cause the figures to fluctuate, British-made cars are becoming more competitive, a significant development which adds weight to Lamont's contention that car trade will be in surplus by the mid-1990s.

There was more evidence in the industrial production figures for June. They were less dramatic than the trade figures but modestly encouraging and support the growing feeling in the City and Government that the worst is past. Industry and City are divided. The former sees little to cheer; the City, standing back a little, thinks that the worst is over. Indeed, in some quarters a distinctly bullish mood about manufacturing, and engineering in particular, has developed.

Take, for example, a recent study from UBS Phillips and Drew, which talks of capital goods leading the recovery in the market and recommends shares in Tarmac, RMC, GEC, British Aerospace, British Steel and GKN. "In general, the capital goods sectors will be the main beneficiaries of the shake-out of labour that is currently underway," says the study.

Reflecting the competitive gains being made in car manufacturing, Phillips and Drew is also bullish about the outlook for productivity. In general it sees it bouncing back from last year's 0.25% to 1.5% in 1991 and to 4% next year. With these overall figures it predicts some striking productivity gains among the traditional metal bashers. Metals, engineering, manufacturing and that other still important industry, textiles, are all forecast to show far greater gains than now-battered service industries like transport, distribution and banking.

Evidence from the Engineering Employers' Federation also supports the view that competitiveness is still improving. Exports to the European Community, now the engineering industry's most important market, continue to do well. In 1983 they made up 38% of the total; in 1990 more than 50% for the first time; and for the first four months of this year more than 55%. "It is likely that in 1991 the UK will have a surplus of engineering exports over imports for the first time since 1982," says the EEF.

Could it be that Mr Lamont will prove the luckiest Chancellor since the war? Heir to a productivity miracle that may have faltered but has not died?

(Roger Eglin is managing editor of Sunday Times Business.)

True heroes of the trade battle.

When it comes to trade figures, the old soldiers of manufacturing are best. Top come the power generator makers, repeatedly leading the battle to regain Britain's trade surplus (see chart). Captained by NEI plc (which is owned by Rolls-Royce plc) and GEC Alsthom (a joint British and French venture), they are now in testing times - mainly the result of a temporary saturation of demand for new power generators.

But hope lives. The UK is one of the few countries with two major manufacturers in this high-tech field, maintaining a high profile by massive investment and by "dreaming up" designs that get more power for less cost. Prospects include Iraq - if it gets straightened out - and India - if it finds the money.

The "new Europe" may end nepotism and bring more orders. A change in fashion to gas-burning combined cycle power stations is also adding a spark to dull times. But in a world haunted by Siemens and Mitsubishi, British firms need all of their ingenuity to land the big orders. So far so good. Particularly since the bulk of control is still in British hands.

UK trade surplus - ranking by industry

Trade

surplus

Industry 1975 1980 1985 1990 1990 £m

Power machinery 1 2 2 1 1,733

Petrol and products 56 21 1 2 1,223

Pharmaceuticals 5 4 5 3 1,100

Transport equipment 61 7 3 4 1,051

Chemicals and products 7 9 7 5 869

Organic chemicals 27 8 4 6 758

Specialised machinery 3 1 6 7 710

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