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Economy

Overseas demand provides relief

Written by Gary Howes

Wednesday, 23 July 2008

Manufacturing sector main beneficiary of global demand.

The Bank Of England has said the manufacturing sector remains in good condition as a result of growing overseas demand for UK produced goods. Asia and the middle east proved to be the main global drivers of this demand.

The news comes as a welcome relief today as the housing market and services industries both posted disappointing results in July’s publication of the Bank of England’s Agents’ Summary.

This publication is a summary of monthly reports compiled by the Bank of England's Agents, following discussions with around 700 businesses. It provides information on the state of business conditions, from firms across all sectors of the economy.

The report says that external demand remained firm in June and the score for manufacturers’ exports increased slightly. the euro area was steady, supported by resilient German markets, and demand in Eastern Europe continued to accelerate.

With the exception of consumer goods and construction equipment, US demand growth was reported to
be stable. But the strongest growth remained in Asia, and also the Middle East where pricing in euros had become more common — to the advantage of UK manufacturers.

Bright spot for services

While the service sector in the UK has not fared well in the report, those who expanded their operations overseas reported healthy growth. Architects and consulting engineers received special mention.

The Agents’ score for business services output fell again in June, its fourteenth successive monthly decline since its peak in April 2007. There were declines of similar magnitude in the scores for professional and financial services, and other business services. In professional and financial services, the
tightening in credit conditions continued to restrict the availability of funds for commercial property developers and private equity companies.

That had contributed to sharply reduced volumes of corporate transactions for lawyers and
accountants. Insolvency practitioners were expecting a sharp increase in their workload this year but most reported that it had yet to materialise.

Manufacturing steady

Manufacturing output growth was unchanged in June, reflecting slightly weaker domestic demand but slightly
stronger overseas demand. Production of capital goods continued to expand strongly in areas such as commercial and military aerospace, agricultural machinery and a variety of energy-related sectors.

Capacity constraints in manufacturing and services continued to ease. Some manufacturers reported lower levels of outstanding orders and a reduced backlog of work, suggesting capacity utilisation would weaken in the coming months.

Employment holding on

All of the Agents’ national average scores for labour market quantities declined in June. Many contacts reported fewer recruitment difficulties and reduced turnover of skilled workers.

Labour demand had fallen sharply in the house building industry and in property-related
services such as estate agencies and conveyancing, with widespread reports of redundancies and business closures. In other parts of the economy, redundancies were uncommon — though some firms had reduced staffing through natural wastage and some had either frozen or cut back on recruitment.

By contrast, firms with a preponderance of highly skilled workers such as in professional and financial services were prepared to hold on to labour during the slowdown and many were continuing with their graduate recruitment programmes.

With regards to pay increases the private sector saw a fractional rise in requests for salary increases. It is believed that this could be a result of employees wanting to hold on to their current standards of living that has been eaten by rising levels of inflation.

Those employers in the public sector expect a tougher time in the coming months as unionised workforces were more apprehensive about their next pay round.

Increasing wages will be a worry to the Bank of England as this will have a large potential to increase inflation. At present it is believed that inflation is being driven by higher fuel prices and food prices – all related to global influences. However inflation fueled by wages at home will create more cause for the Bank to increase interest rates.