By Graeme Davies
Many column inches have been devoted to the possibility of a ‘triple dip’ recession in the UK as economic activity indicators have turned downwards once again. The UK economy is dominated by the services sector, but the government has talked at length about rebalancing the economy to encourage the manufacturing sector to contribute more – although the most recent budget with its attempt at boosting the house building sector and the wider housing market suggested that hopes for such a rebalancing could be on the wane.
So, what of the manufacturing sector in Wales? A recent survey of business activity by Lloyds TSB showed the private sector in Wales continuing to expand and create jobs, even though the pace of expansion slowed a little in February after a bright January. But this was mainly down to a slowing in service sector activity as the manufacturing sector showed further signs of health.
Welsh manufacturing is aided by the fact it has transitioned away from labour intensive ‘old economy’ manufacturing to more high tech and specialist manufacturing linked to major growth areas such as aerospace and energy.
And with these sectors still enjoying strong growth on a global scale, and in the emerging economies of Asia and Latin America in particular, the future looks a little brighter for Welsh manufacturers.
The global downturn may have been tough, but it has concentrated minds on improving efficiency, slimming down on costs and targeting areas where demand is growing, and this has been an important injection of discipline when companies have been forced to contend with input price inflation.
This has enabled companies to grow their profits more rapidly when demand has picked up again as margins are better and proves the old adage that only the fittest survive.
There could also be a further boost to come for exporters in the coming months if the recent weakness in sterling is sustained. Expectations of further easy monetary policy have weakened sterling and, for exporters, this could create a welcome boost as their goods begin to look cheaper compared with rivals’ output priced in dollars.
There are potential mitigating factors such as inputs being priced in dollars and the fact that many companies burnt in previous periods have hedged their currency exposure for several months hence. But when these hedging arrangements run their course some companies could see an uplift.
But manufacturers do remain under significant pressure and, even though Asia and the US are showing signs of a pick up in activity, the UK still relies heavily on sales into the embattled Eurozone where economic indicators remain dire.
The budget did little to suggest that manufacturers are going to get a great deal of additional help from a cash strapped government, although the pre-budget announcement of a £1bn public investment in an aerospace institute aimed at protecting thousands of jobs in the industry may help that sub-sector, including the 20,000 Welsh jobs connected to aerospace.
Welsh manufacturing has become concentrated around key industries, such as aerospace, automotive, technology, energy and optoelectronics, and this stands it in rather better stead than many of the other UK regions. Manufacturers have had to move with the times very rapidly in recent years, but Welsh manufacturers find themselves, for the most part, serving industries where growth prospects for the coming years look decent, despite the wider global economic uncertainty.