THE authoritative CBI quarterly survey has confirmed others in finding
that for the first time since the recession began businessmen are
feeling more confident about the future.
But, as David Wigglesworth, chairman of the CBI's Economic Situation
Committee, pointed out, we will only know for sure if this hope is
justified when the increase in business actually shows up in the
statistics.
However, the precedents are encouraging. The survey shows that 19% of
manufacturers are more optimistic than they were four months ago and 17%
less optimistic. The difference or balance between the two measures the
trend and the latest plus 3% compares with minus 26% in July and the
recent low of minus 51% in January.
The latest swing, from minus 26% to plus 3%, is much in line with the
swings which were subsequently shown to mark the end of the two previous
recessions. In 1981 there was a move from minus 27% to plus 8% and in
1976 from minus 18% to plus 10%.
The confidence measure is volatile -- after all businessmen are human
beings with as many swings in mood as anyone else -- and it happened
that actual demand turned out to be much lower than they had forecast in
the last survey in July. But the match with past patterns is telling.
However, it is worth bearing in mind that in the last recession gross
domestic product started to recover in 1981 although it was not until
1983 that manufacturing output started to rise.
Statistics will no doubt show the economy coming off the bottom in the
second half of 1991, as the Chancellor forecast in the Budget, but it
will be many months yet before the man in the street notices. Mr
Wigglesworth talked of a slow increase in well-being next year. The
problem for the Government is whether any improvement in the ''feel
good'' factor will come through in time for the election.
Now the downward trend in new orders is expected to come to an end in
the next four months, with a balance of 2% of firms looking for a small
improvement. A similar proportion is looking for a rise in output. It is
the first time for 18 months that manufacturers have not anticipated a
decline in demand.
But this view is not universal. Large companies, defined as having
over 5000 employees, still see a further drop in demand while smaller
ones are more hopeful, particularly those with between 200 and 500
employees. Also optimism varies between sectors, with capital goods
manufacturers expecting to reduce output further.
As might be expected domestic markets are more depressed than export
markets, and order books for the latter have picked up marginally.
Export optimism has improved for the first time since April 1990. Now
27% of firms are more optimistic about export prospects and 13% less
optimistic. This is certainly encouraging for the balance of payments
but is rather odd considering that the main engine of Europe -- Germany
-- is slowing rapidly.
It is to be hoped that stronger growth in the US economy will take up
the slack next year, though current signals remain unclear. The dire
state of the domestic economy is forcing companies to put more effort
into exports and trends in unit costs are encouraging for UK
competitiveness. They are expected to grow at the lowest rate since July
1986. Productivity has already improved by over 3.5% in the past year
and the CBI survey points towards the trend continuing.
Against this the CBI is concerned about the fall in manufacturing
investment, though this is starting to level off. It will take a long
time for the trend to reverse and only when there are firm signs of
rising demand will companies start investing more -- mere expectation of
an upturn will not be enough. Some 69% of firms are now working below
capacity, a slight fall on July's 71%. Availability of finance is only a
minor factor behind investment decisions, contrary to some observers'
opinion. Working capital pressures are also easing.
Recessions are always exaggerated by manufacturers running down stocks
and this can go on for many months when weak demand means there is
virtually no chance of a sudden upsurge in orders leaving them short of
stock. In the year to June destocking amounted to 2.3% of GDP. The past
four months saw the sharpest cutback in stocks of finished goods since
January 1983 but this is now expected to slow. A similar trend applied
to stocks of raw materials and work-in-progress.
One of the most startling findings of the survey is that the
proportion of firms cutting prices matches that in February 1967 but is
otherwise the most significant since 1959. So profit margins are being
squeezed relentlessly. Firms expect to lose further jobs at a slightly
slower rate in the final quarter of the year, pointing to perhaps 60,000
job losses in manufacturing, against 70,000 in the third quarter.
While sheer necessity has forced companies to cut capital investment
at least they are not falling down on two other traditional failings of
UK industry, training and spending on innovation. In fact, a significant
increase in training expenditure is forecast over the next year, and
innovation is set to absorb more resources following three surveys of
static spending. This was the case for all but the smallest firms having
fewer than 200 employees.
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