Although we've blogged on how global demand - especially from emerging economies - is helping drive the recovery in manufacturing, today's news out of Ireland is a pretty stark reminder of the risks posed by the global economy.
The G-20 meeting in Seoul managed only loose commitments to resolve the economic imbalances behind the currency war.
China is signalling it’s concern about inflation (which is code for their going to let the reminbi appreciate), which has knocked 5% off the Shanghai markets. This could have been typical pre-G-20 posturing, or it could reflect significant concern about rampant credit.
And now rumours are swirling of Ireland requiring, but shunning a bailout.
Where does this leave UK manufacturers? Many UK businesses I’ve talked to are concerned about the impact on three key points: demand, costs and profits, with further Sterling volatility being the worrying wildcard.
The concern about demand
If goods exports to China have risen by 44% since the start of the year, a trade war involving China and other developing economies, such as Brazil, could undermine the demand that is helping to drive growth in the UK. Most manufacturers worry that, if the currency battles slip into protectionism, then developing economy demand may dry up, profits could get hit or materials costs could rise (e.g. China produces 97% of global rare earth mineral supply).
So far, so good. But what will happen to UK exports if the UK doesn't try to competitively devalue its currency? Would that help mitigate the damage from a trade war? Would the UK be viewed by China, Brazil and others as a benign trading partner, and so avoid the worst of the restrictions? Or would UK exports become collateral damage, caught in the crossfire between the US, China and others?
With the bulk of exports still headed for the EU, UK firms will have a decent buffer against such global headwinds. But the longer a trade war between the US and China persisted, the more likely the global economy - and UK exports with it - will suffer.
Profitibility could be hit
Over the past decade, many firms protected themselves against a strong pound by buying and selling in dollars and eruos rather than pounds. This is standard practice for firms operating out of small, open economies and with exports making a big contribution to turnover. This way, if sterling moves, then firms take the hit on profits rather than on orders. This is why, as sterling fell during the recession, EEF's Business Trends survey showed improving profit margins on exports, even as world trade fell.
What's this mean for a currency war?
If the UK doesn't try to devaule it's currency, sterling will probably rise, for example, relative to the dollar. As discussed above, this will hit profitability, while potentially protecting orders. The knock to profits could eventually feed through to greater caution on investment and employment intentions.
If the UK tries to devalue the pounds, for example, through further QE, then profitibility could be temporarily protected, but at the cost of demand if protectionist measures begin to bite.
Cost of commodities
Over the past couple of years, a weaker dollar has meant rising commodity prices. Allowing sterling to appreciate could insulate UK firms from rising costs, while also helping to dampen down inflationary pressures in the UK (as import costs reduce).
But as we said before, getting caught up in competitive devaluations could mean getting caught out on access to China's supply of rare earth minerals.
A spanner in the works
The one issue that could through all this analysis - and firms' best laid plans - out the window is further exchange rate volatility.
Stirling volatility over the past year or so made planning for the recovery difficult, and another bout of it could keep cash-rich companies' on the sidelines of the economy until the G-20 manages to either resolve the currency crisis or settle the Doha trade round.