Financial job losses Fears that the UK could be facing a prolonged period of economic weakness have risen after a survey of manufacturers showed few companies believe a recovery has started, while many continue to be frustrated by the reluctance of the banks to release credit.
In the latest Financial Times manufacturing barometer, fewer than a third of companies said they thought an upturn had taken root in their sector, while 40 per cent said they felt that banks were still being restrictive about providing loan finance.
FT Manufacturing Barometer
Interactive feature: See how fifty-nine UK manufacturing companies across the UK are coping with the downturn in the latest FT survey
Of the 62 companies in the survey, only one in 20 thought pressures on the availability of credit from banks had eased.
The issue of banks stepping up loans to businesses hit by the recession has become a hot topic politically.
Last week, Lord Mandelson, the business secretary, told the FT that banks were adopting an “excessively cautious and risk averse” approach to lending to companies, and so putting the recovery at risk.
In a further swipe at the banking profession, 37 out of the 62 company representatives in the FT survey said they agreed with the comments by Lord Turner, chairman of the Financial Services Authority, that many bankers were engaged in “socially useless” activities.
CASE STUDY
‘Upbeat and excited’ about recovery hopes
Tony Walker, helped by a £500,000 investment in machinery and a new sales and manufacturing operation in China, says he entertains “reasonable hopes” of a decent recovery for his business in 2010.
Mr Walker is managing director of Ritchie, a family-owned manufacturer based in Forfar, Scotland, that was started in 1870 as a blacksmiths.
Since then the company has moved into two specialist fields that form the biggest part of its business: handling and storage systems for industrial gas containers used, for instance, in welding applications, and equipment for holding or weighing live animals, which are bought largely by farmers.
With 108 employees, the company in the year to May 2009 had sales of £12m.
In the year to May 2010, however, revenues are likely to dip to about £10.5m, due to the impact of the recession.
But, looking further ahead, Mr Walker says: “I am feeling moderately upbeat and excited by the opportunities.”
A former Rolls-Royce engineer who has been with Ritchie for 35 years and who has run the company for the past five years, Mr Walker says the new £500,000 cutting machine – which is being purchased with the help of a government grant – should increase productivity at his company’s main factory while also making products at a higher level of quality.
He also has high hopes of a joint venture with a Chinese company, under which some components and complete products will be made in China, where labour costs are much lower than in the UK.
In this part of the survey, six respondents disagreed with the peer’s views, while 19 chose not to give an opinion.
Peter Weidenbaum, chairman of Trumeter, a Lancashire-based company that makes lighting components and measuring systems, said: “The banks are still not in lending mode and their attitude is stifling the recovery.”
He said that banks were “proving reluctant” to lend his company, on suitable terms, the £1m that it needed to finance a re-investment programme linked to a £51m, five-year order for new automotive lighting.
The overall reading from the FT barometer – which tracks demand and sentiment in manufacturing according to six key indicators – has come in at -1.1 in October.
While still negative – and therefore indicating relative gloom – the reading is up from the score in July of -2.4, and better again than the figure in May of -2.8. This fits in with data suggesting that the overall economy is slowly gaining strength but is still in a fragile condition, with any expectation of a rapid upturn fading from view.
Recent government data showed that manufacturing output dropped sharply in August, undermining hopes of a strong bounce-back for the economy in the third quarter after the worst recession since the early 1980s.
Since a high point in the sector’s output last year, manufacturing production has dropped 14.8 per cent, with some fearing that this could fall further in the coming months.
Martin Burnham, managing director of Independent Forging & Alloys, a Sheffield-based metals company, said that he thought banks were charging “excessively high” rates of interest for new loans – even for those companies that had good prospects and a strong track record.
“The interest rates the banks have been discussing are in the range of 8-12 percent. This seems an unreasonably high figure when the [Bank of England] base rate is 0.5 per cent.”
Richard Merrick, director George Stuart, a maker of fashion belts based near Walsall in the West Midlands, said banks were making it harder for companies such as his to recover by charging “punitive” rates of interest on new loans.
This led to a disincentive to companies to invest in the economy when it was most needed.
“I think Lord Turner understated the case – banks currently are not so much socially useless as socially destructive,” Mr Merrick said.
Even in the cases where companies are not complaining about banks’ attitudes, they generally paint a picture of tighter margins and general uncertainty.
Kevin Parkin, managing director of DavyMarkham, a Yorkshire engineering business, said that – in contrast to others in the survey – he had no complaints about his lending bank.
However, Mr Parkin said he had “very little hope “ of any meaningful recovery in his company during next year. “We have seen higher demand, which is welcome, but I think this is more to do with an end to destocking in the economy in general rather than any real uplift,” he said.
The British Bankers’ Association, the main trade body for the industry, said that banks were still anxious to lend to businesses, but that companies had to understand that “interest rates will be based partly on the cost of funds to the bank and partly on the risk involved”.
CASE STUDY: I feel we are being exploited
Jason Nicholson says he becomes “quite emotional” when summing up the attitude of his lending bank to his company’s predicament. “I feel we are being exploited,” says Mr Nicholson, joint managing director of Unicut, a maker of metal parts based in Welwyn Garden City.
With businesses partner Charles Kenny, Mr Nicholson has been talking to his bank about a £200,000 loan for new equipment for his 17-year-old business.
The company employs 31 people and expects this year to have sales of just under £3m – down from £3.5m in 2008. Despite the fall in revenues and a “challenging” trading environment, Mr Nicholson still expects the company to stay profitable.
In the past six years the company has invested £5m in new equipment – mainly high-tech machine tools to turn out small components for sectors such as aerospace.
“In my view the bank has been unreasonable by saying they would provide a loan of this size but only with a large personal guarantee of the order of £200,000-£300,000, when in the past they have not wanted this form of security.”
Also, says Mr Nicholson, his bank says the interest rate on a loan of this sort would be 5.5 per cent – or 10 times higher than the current Bank of England base rate – while also increasing greatly charges for services such as renewing overdraft facilities.
“In the past they have levied a charge of around £1,250 for this kind of service while now they are instituting a charge of more like £2,000. This seems to me excessive.”
