Managers are cautiously optimistic about prospects for the UK manufacturing sector, pointing to ten...
Managers are cautiously optimistic about prospects for the UK manufacturing sector, pointing to tentative signs of recovery.
The sector has been mired in recession in recent years, despite booming consumer confidence, which has led to the UK being seen as a two-tier economy. From a high point of 3.2% on 30 June 2000, UK year on year manufacturing production growth had fallen to -4.3% at the end of April 2002.
However, Alex Tarver, fund analyst at Fidelity, says a strong dollar and low oil price, which has brought down raw material and transport costs, have benefited UK manufacturing.
'The dollar has recently been falling whereas the oil price has been rising,' he adds.
While UK consumer spending has been robust, Tarver questions whether this will continue if interest rates rise this year, and tax changes come in next year.
He says: 'There will be winners and losers in the sector and we hope to pick the winners by using a bottom-up approach looking at where firms get their raw materials from and their exposure to consumers.
'There are more opportunities to find the winners perhaps, and we are cautiously optimistic,' he says. 'It just depends on just how much of an impact the negative forces have.'
According to Jeremy Peat, group chief economist for the Royal Bank of Scotland, the UK manufacturing sector will experience a slow, steady recovery throughout the rest of this year.
'The UK economy has been though a traumatic period, he says. 'We have seen a deep recession for two reasons, an overvaluation of sterling versus the euro made UK exports uncompetitive, and a decline in global trade growth in 2001 and 2002 has created market difficulties.'
However, there are now signs of a distinct improvement in the world economy, according to Peat.
'Recovery in the US has fed through to the eurozone and parts of Asia and since March some adjustment of exchange rates has helped sterling,' he says.
He is more optimistic going forward and expects continued recovery, but at a slow pace and coming from a low base.
'The thing that is not going to change is the fact we are in a highly competitive world and manufacturers will find competition margin pressure just as intense as before,' he says.
It is this competition that determines the best areas of the UK manufacturing sector for investors.
According to Peat, the areas that face most pressure, and will therefore potentially make worse investments, include commodities and those sectors competing against Eastern Europe and Asia.
The best areas are those that are moving upmarket towards higher value-added niche areas, he adds.
There will be continuing difficulties for IT and telecoms firms and they are likely to make a slower recovery than other sectors.
There has to be a rebalancing of the UK economy, according to Peat, which will cause uncertainty for the UK manufacturing sector, with rises in interest rates, possible changes in consumer demand and further concern over sterling.
Dollar is strong against other currencies.
Oil prices are currently low.
Global economic recovery.
Continued diffculties for IT and telecoms.
Interest rates to increase.
Recovery coming from low base.
Warns on profits
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First mentioned in Cridland Report