EEF blog

Britain’s manufacturers are finally beginning to feel some relief from the combined efforts of the Bank of England and the government to unblock bank lending.

But despite manufacturers reporting an easing in credit conditions for the first time in over a year, it is clearly too soon to say conditions are back to normal and policymakers cannot afford to assume the issue closed.  

Firms have been struggling with credit constraints for the best part of two years. Efforts to restore some normality to financial markets were always going to take time, but conditions are now starting to improve. If this continues it will help allay fears that credit constraints would derail companies’ ability to take advantage of the recovery. 

That said, the government and the Bank of England will need to move carefully. Even as we start to see clearer signs of an upturn companies, especially SMEs, will remain vulnerable to higher costs or reductions in the availability of credit.

We've been tracking credit conditions for manufacturers on a quarterly basis since the end of 2007. For the first time, relatively fewer companies reported an increase in the cost of credit over the past two months. Equally importantly, considerably fewer companies have seen a reduction in the availability of new and existing credit facilities which implies lines of credit and finance are freeing up.

Key results:

• 32% of firms reported an increase in the overall cost of finance from banks and other finance providers in the past two months. This compares with 47% in the third quarter and
• 44% in the second quarter. This is the lowest figure since this survey was first conducted at the end of 2007.
• 47% of companies saw the cost of new borrowing rise in the past two months, down from 56% in the previous quarter.
• The proportion of companies reporting higher fees on existing lines of credit fell to 28% from 43% in the third quarter.
• A fifth of companies reported a decline in availability of new lines of borrowing, down significantly from 33% in the third quarter and 42% in the second quarter.
• Fewer companies are also seeing a squeeze from parent companies, with 15% report a decline in finance from the parent compared with 24% in the third quarter.
• The pace of decline in the availability of credit insurance has also eased with 48% of companies reporting declining availability compared with 69% six months ago.

The survey was conducted between November 4th and 25th with 410 companies responding.

Following the record falls in manufacturing business investment in the second quarter, today's data for q3 failed to bring much good news.  Investment levels in manufacturing fell another 10% in the three months to September - which leaves quarterly levels of investment more than £1 billion lower than pre-recession levels.

With the Pre-Budget just around the corner, this further fall makes the case for current support for investment - in the shape of increased capital allowances - to be extended for a further 12 months to April 2011.  Even for companies planning to invest in some brand spankin, productivity beating new equipment today the lead times involved could mean that companies might miss the cut off for the 40% rate - a point that EEF has been raising with Ministers and officials in the Treasury.

It's hard to ignore the lessons from previous recessions - once investment starts to fall it takes a long time for things to turnaround.  Global competitive pressures will undoubtedly intensify as the economic recovery gathers some momentum - the UK can't afford to wait years for investment to return to growth.

Friday 13th may be unlucky for some, but for Lord Mandelson, last Friday was an important day.  Hardly anyone, except for consitutional geeks like me, will have noticed, but it was the day on which Statutory Instrument 2009/2748 came into force.

This piece of secondary legislation, approved by The Queen personally at a meeting of the Privy Council last month, goes by the long title of the Ministers of the Crown, Secretary of State for Business, Innovation and Skills Order 2009.  As the name suggests, it puts on a legal footing the changes announced by Gordon Brown in his reshuffle in June, when he gave Lord Mandelson his new empire, and merged the short-lived DIUS with BERR.  Whilst the change in ministerial title took effect immediately (Her Majesty can call her Secretaries of State what she likes, and perhaps in private, she does), the actual merger or creation of Departments takes legislation to transfer their functions and amend existing legislation.

So the latest Order asserts grandly that 'The person who at the coming into force of this Order is the Secretary of State for Business, Innovation and Skills and any successor to that person is by that name a corporation sole.'  It then goes on to transfer the functions of the Secretaries of State for DIUS and BERR to the new overlord, and to clarify that actions taken by those previous Secretaries of State still have legal force.

The most notable element in this order is that the actual transfer of functions itself is relatively simple, transferring the entirity of the old Departments' functions to the new one.  The order two years ago creating BERR and DIUS (as well as DCSF) was much more complex, having effectively to split two departments into three.  A look at that document shows how disruptive and messy organisational restructures can be, and why they should be avoided if at all possible. 

Institutional instability has a very disruptive effect on businesses, and recent structural changes (notably in the skills sector) have risked adding to existing confusion.  Some Parliamentarians have rightly expressed concern about the ease with which Prime Ministers chop and change Departments, and this little-noticed report  by the Public Administration Select Committee is well worth a read.

Week in Review

Yesterday, the government launched its National Skills Strategy. Most of the strategy looks good especially as it endorses many of the proposals in the recent report by UK Commision for Employment and Skills. 

But the real task now is for government to actually deliver its promise of a world class, demand led system that will meet the needs of the UK economy for the next decade.

The two key elements EEF are particularly pleased with are the long-overdue simplification of the current system, skills accounts for every learner and stronger pathways into Higher Education for apprentices.

Commenting, Steve Radley, Director of Policy at EEF the manufacturer’s organisation, said:

“This strategy comes at a crucial time. Given the urgency brought on by the recession it is more important than ever we have a skills system that helps UK businesses to succeed in highly competitive world markets.   

“Employers have been crying out for simplification of the current confused and cluttered system. This strategy has to be the definitive move to a more demand-led system , driven by the needs of employers and learners ."

However we do have some concerns about the plans to move power to plan skills strategies to the Regional Development Agencies. Despite government's claims at building a demand-led system, this move was done without consultation with business.
 
We are sceptical that giving new powers to Regional Development Agencies is the right approach to planning skills strategies. A sector-led view that will most accurately reflect the needs of business.

We would have happily told them that if they'd asked. Maybe that's why they didn't?

Manufacturing output grew in September by 1.7% compared to August. That's far higher that the consensus figure of 1.0%.

Does that add grist to the mill of those that expect the q3 GDP figures to revised up from -0.4%? Not really.

The 1.7% month-on-month growth is a welcome sign that manufacturing is beginning to rebound from the lows of the recession. But it also reflects a fairly quiet August. For example, car production was down almost 47% between July and August from 107,635 cars to just 56,737). But it more than doubled in September to 119,616.

So today's number wasn't so much a sign that September was so great and that a strong recovery has taken root, as it was simply a result of getting back to business after summer holiday shutdowns.

I think the q3 GDP estimate will be revised up, but only slightly. The decline may have halted (for now), but we still face a long climb back up to a strong economy.

Today, EEF hosted a breakfast seminar on the future of finance in the UK.

Our central question was whether we had the right financial architecture to provide long-term capital to growing companies. The answer was resounding no.

Our first speaker, the Rt Hon. John McFall, Chairman of the influential Treasury Select Committee, said quite simply:

"The British banking architecture is not fit for purpose. To achieve growth, we need to get on with reforming the banking system and the there is a clear case for government to intervene directly to invest in creditworthy businesses and individuals. Without this the recovery of the private sector will be impaired in the longer term.

For him, the current narrow debate on public sector spending cuts missed the mark. He believes that social costs of cuts imply that we should also think about how to boost growth; growth that would only come if we addressed the lack of thinking in the banking sector and got government capital behind creditworthy businesses.

Rex Vevers, the Finance Director of Ceres Power which makes fuel cell technology to replace your standard gas boiler, said the problem with the current system (and that includes both private and public sector capital) is that it lets business down at the very costly, but extremely important development and commercialisation stages:

"It all comes down to the cost of capital. If government capital can help lower risk, it will lower the cost of capital and attract more finance."

Our last speaker, Shantha Shanmugalingam, Director of Investment at NESTA, said that while we're alright as a country at seed capital, we really let ourselves down when it comes to growth capital. In his view, the right set of reforms to the financial architecture could help foster the diversity of funding found in the US, for example:

"The issue is innovation - innovation in financial services can be a good thing, but it depends on where the innovation is targeted."

But the most interesting issues came out from the discussion.

The first was education: Financiers, politicians and government officials simply don't understand real businesses, especially capital-investment intensive companies. While there is a lot of skill within the financial sector, there wasn't a lot of understanding of the real world. That fundamental problem needs to be addressed is a priority.

The second was the role of non-execs on bank boards. Who are these people and are they interested in the long-term success of the bank or the next quarter's results?

For my money its about getting the right mix between reform of the financial architecture and getting finance and government to truly understand what drives long-term growth and prosperity.

Moving on up? 

The CIPS/Markit Purchasing Managers Index (PMI) is a monthly qualitative survey of manufacturing activity. Typically, any number below 50 suggests the sector is contracting; anything above 50 is growth.

For most of the recession, the manufacturing PMI tracked sharply negative. The indext flirted with 50 (i.e. no growth) throught the summer.

And now that autumn is finally here, its come in at 53.7, up from 49.9. The real story is the new orders index, which is up to 59.5.

Orders are beginning to benefit from the weak pound and the inventory cycle. But one month does not mark a trend and confidence is still scarce on the ground. Given the level of fiscal stimulus in the economy, the fourth quarter of this year was always going to be relatively better than the rest.

But many companies are still looking to the spring as the first sign of a turnaround and so are worried that a weak start to the New Year, when the scrappage scheme runs out of many and the VAT cut is reversed, could prevent a sustained recovery from taking root.

Looks like the government and the BoE still have their work cut out for them.