Manufacturing has made great strides in recent years but faces a more difficult environment in 2008. EEF’s Business Trends Survey showed that on some indicators, manufacturing activity was at its strongest for ten years in 2007.
The manufacturing sector entered 2008 feeling fairly confident about growth prospects in the near future. However, discussions with manufacturers indicate that they are becoming nervous about the outlook for the second half of 2008 and about how the credit crunch will affect a number of their key markets.
The evidence so far suggests that the direct impact on manufacturers of tighter lending conditions has been fairly limited and that investment intentions have held up. This reflects the fact that most manufacturers have been funding investment through their retained earnings rather than borrowing.
However, we are yet to see the full effects of the credit crunch on bank lending while weaker growth prospects are likely to bear down on manufacturing investment. In addition weaker domestic and export markets will make it harder to pass on cost increases and intensify the squeeze on profitability and the funds available for investment.
It is therefore vital that the government supports manufacturing in maintaining its improved performance in more difficult conditions and avoids measures that would sap its resilience.
In particular, the Budget needs to restore the damage done by the botched capital gains tax reforms by sending out a signal that the government understands the needs of business for a simple, predictive and competitive tax system.