Manufacturers unscathed by credit crunch

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While banks and other financial institutions find themselves being squeezed by the credit crunch, the latest survey from Britain's engineers and manufacturers finds that, so far, they have emerged relatively unscathed from the turmoil in the money markets.

The EEF, formerly the Engineering Employers' Federation, says that only a small percentage of companies are seeing a significant increase in the cost of finance. There are also few signs that the turbulence in financial markets is affecting investment intentions, which remain above their long-term average.

The Bank of England's Monetary Policy Committee will announce on Thursday any move in interest rates. Whether the credit crunch has fed through into the "real economy" has been identified by Bank officials as a key factor in their decision-making.

According to the EEF, only 3 per cent of firms have seen a significant increase in credit costs, with 28 per cent reporting a "moderate impact" and 40 per cent of firms seeing no change. Some 60 per cent say it has had no impact on their investment plans and, contrary to the Bank of England's own recent Credit Conditions Survey, there seems to be no noticeable difference in sentiment by size of enterprise.

The EEF's chief economist, Steve Radley, said: "Despite rising oil prices, a falling dollar and a more uncertain economic outlook, manufacturers recorded another quarter of healthy growth, and are looking to the future with a degree of confidence. Investment intentions also remain strong, reflecting their continuing commitment to drive up productivity. Though the economic outlook remains unclear, manufacturers' greater resilience should mean that growth continues into 2008."

Order and output balances were both in positive territory for the ninth consecutive quarter, and, in contrast to the last quarter, export orders to both EU and non-EU countries picked up, while domestic orders edged down slightly. However, the balance of firms reporting falling margins on export sales indicated that the weaker dollar was beginning to take its toll. The decline was most marked in sectors particularly exposed to movements in the dollar, such as electronics and aerospace.

All sectors reported positive output balances over the past three months, with motor vehicles and electrical equipment reporting the strongest balances for the second quarter running. With the exception of basic metals, balances on order volumes were a touch weaker, although for most sectors they remained in double digits. Once again all regions reported positive balances on output.