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The worst may be over for manufacturing

The manufacturers’ organisation, EEF, has just noted in its latest survey that  “The effects of the recession appear to be stabilising in some sectors as destocking nears an end….The weakness in world markets has hit the sector hard, but it looks like manufacturers are now close to the bottom of the cycle.”

 

The “stock cycle” has a major impact on the economy as firms react to a severe downturn in demand during a recession. The first thing to be cut is the levels of stock or inventory being held. So, rather than bearing the costs of producing more goods which are unlikely to sell, firms quite reasonably run down their existing levels of stock. In fact, this stock sell off which started at the end of last year was the largest since 1955 when records began, and had a major impact on the subsequent fall in UK GDP.

 

Following, these measures firms try to cut their costs further by freezing or making cuts in wages or by laying off workers. But, even if demand is not picking up, once companies have run down their stocks they have to start increasing production once more. It is this effect that we are seeing signs of at the moment and one which is necessary to start taking us out of recession.

Some renewed optimism being shown for new car output

Some renewed optimism being shown for new car output

 

The EEF has now noted that “for the first time in six months, the output balances in basic metals and motor vehicles improved, reflecting the fact most of the significant production cuts by the automotive industry had already been carried out in the previous two quarters.”

 

The EEF notes that looking to the next three months, almost all sectors are less pessimistic about output and orders from both domestic and overseas customers. However, the situation is still grim and the EEF has downgraded its growth forecasts for 2009. It now expects manufacturing output to fall by 11%, but sees a return to growth in the final quarter of 2009 which will be followed by a modest recovery of 0.4% growth in 2010. However, engineering output is forecast to fall by 17.5% this year and by 0.8% next year.

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Posted in GDP, Manufacturing, UK industry

1 Comment on The worst may be over for manufacturing

  1. Hi, good post. I have been wondering about this issue,so thanks for posting.

    AndrewBoldman | June 4, 2009 at 6:52 pm () ()