Confidence spillover

Subscribe to Campaigning blog feeds


Last week's disappointing PMI numbers said a lot about confidence at the start of 2011q4. Confidence is going down; not just in the UK but in the global economy.

How is falling confidence impacting on real activity for manufacturers?

The first place confidence spills over is into firms' business decisions that have longer time horizons – investment and recruitment.

Manufacturers have longstanding issues finding the skilled employees they need. But it is also fair to say that the sector has not been a source of long-term employment growth for the economy overall. Neither of those things looks likely to change in the short term.

So focusing on investment, lower confidence means manufacturers see the future demand for their products as less bright – or at least more uncertain.

That goes against potential investment decisions for three reasons:

- potential for lower cashflow making it harder to service any external finance used to help finance investment;- lower demand weakens the case for creating extra capacity;- The value of retaining cash to help firms to cope during a downturn goes up;

On the last point we have an additional piece of evidence – earlier this year George Osborne claimed UK companies were sitting on cash worth 5% of GDP.

But last week's data suggested falling confidence may be spilling over into more than just investment. Customer orders seem to be pulling back too – including those from outside of Europe.How might that work?

Take China as an example. This is a country that relies on export demand to drive growth. Europe is a major market for the Chinese – in 2010 the EU accounted for 20.1% of China's total exports.

The trade balance with the EU increased by a massive 39.5% in 2010 to return close to 2008 levels with a surplus of €108 billion.

If demand from Europe is lower, Chinese growth prospects are lower – unless they can find offsetting demand elsewhere to compensate.

So thinking about what all this means for Chinese companies that buy UK exports, it's important to think about what kinds of goods we export to China.

One of our major exports is electrical machinery for example power generation equipment. Now some of this such as motors and variable speed drives go in to equipping Chinese factories, which for the same reasons as the UK, might be thinking now is the time to hold off on investments.

Vehicles, particularly luxury cars, are a growing export to China. If luxury cars are a purchase item of the wealthy, and the wealthy derive a relatively higher proportion of their income from capital (including owning Chinese factories) – then this is the sort of item that could suffer if Chinese export markets look weaker. This is my speculation only.

But despite all this there are reasons there's still cause for optimism. These confidence impacts are not likely to be as severe in China as they are for the UK. China's export exposure to the EU at 20% is still a way off the UK's 50%+.

Later today Felicity's going to talk more about these causes for optimism.


Media Team 020 7654 1576

Other articles from this author >
Online payments are not supported by your browser. Please choose an alternative browser or make payments through the 'Other payment options' on step 3.