TABLE OF CONTENT

1. Slowdown in export orders in UK Currency Value Eurozone Emerging Market Trends Cost push inflation Weather conditions 2. Impact of Slowdown Job losses Loss of Potential Business Stock Rebuilding

3 4 4-5 5

3. Significance of Changes in Manufacturing

4. Significance of Eurozone countries 5. Competitive differences in Eurozone 6. Pace of UKs Economy over USA 7. Service sector at risk Components of service sector Contributors

10-11 12-14 15 16 17-18

8. Market PMI

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9. How PMI affects businesses in UK 10. References

19-20 21-25

Tables & Figures

Table 1.0 UK exports to Eurozone Figure 1.0 Export value of UK goods & services Figure 1.1 Employment trend in Manufacturing Figure 1.2 Eurozone GDP comparisons Figure 1.3 Gross value add to UK by sector 10 4 6 12 17

UK manufacturing hit by export slowdown: Case study

Part 1 1. Why a massive slowdown in export orders hit Britains manufacturing base in early 2010? According to the Office for National Statistics (ONS), the trade deficit of the imports over exports had increased to 14 billion by September 2010. During this period, the manufacturing sector recorded a growth of only 1.1%. This has fueled concerns over the economys recovery over the recent recession. UK depends heavily on the manufacturing sector & exports to reduce its Trade and Fiscal deficit. However, the recent trend has been reflecting a declining trend adding to the concerns of full economic recovery from the recession. The possible factors that contributed towards a slowdown in exports are closely linked to the recession. The demand for products and services has diminished especially in the emerging markets and the Euro zone. The rising currency value (GBP) and rise in inflation have added to the woes of the manufacturing sector. External uncontrollable factors such as weather conditions have also been known to affect the manufacturing sector. According to the Purchasing Managers Index (PMI) survey, the manufacturing sector was graded at 56.6 in January & February. According to the grading system, any figure above 50, represents growth. The manufacturing sector barely manages to break even during the first half of 2010. (www.supplymanagement.com)

The value of goods exported by UK from September 2007 to September 2010.

Figure 1.0 Sourced from British Chambers of Commerce (2011). The sharp decline in the value of exports is reflected in the fig. 1.0 above during the first quarter of 2010. The factors that have affected the slowdown in Exports are as follows: y Currency Value: The exchange rate of GBP to US Dollar had risen in 2010 to $ 1.57. This increase in the value of the Pound, suggests that the exports become much more expensive than before. The purchasing power of the Dollar declines as more US Dollar is required to keep up with the rising value of the GBP. This could be a potential problem of declining exports. (www.guardian.co.uk)

Euro Zone: During the first quarter of 2010, countries in the EU like Ireland, Greece and Portugal, were heavily pressurized by their debts. As a result of this the Euro Zone faced a sluggish growth rate during this period. The demand for exports was greatly reduced. (www.news.bbc.co.uk)

Emerging Market Trends: Emerging markets such as China & India also faced a sluggish growth during this period. The Chinese economy started growing at a slower rate than anticipated and the demand from these sectors started to decrease as a result of the same. The Chinese economy recorded a growth of 10.3% in the second quarter, down from 11.1% in the first quarter. (www.ft.com)

Cost Push Inflation: Oil prices had risen to $81.52/barrel in January 2010, from $ 77.19/barrel in December 2009. This implied that the cost of production also increased during this period in the UK. According to an article in the Economist (Feb, 2010), the Organizations pushed these costs to the consumers in order to increase/manage their profit margins. This gave rise to cost push inflation and the export prices had risen making them less attractive. (www.eia.gov)

Weather: Adverse weather conditions have conclusively affected the manufacturing output in December, 2010. The output is said to have been affected by 0.1%. (Ashurst, 2011)

2. The Impact of the Slowdown on UK manufacturing base at present time.

Job Losses: The manufacturing sector in UK accounts for the employment of approximately 14% of UKs labour workforce. (Institute for Manufacturing, 2009) The repercussions of the export slowdown are bound to affect the UK economy. Since, the slowdown, the UK manufacturing base in particular has resulted in job losses. This is presented in figure 1.1 below.

Employment (Thousands)
Employment (1000's) 5000 4000 3000 2000 1000 0 1998 2000 2002 2004 2006 2008 2010 2012

3995 3824

3630 3439

3289 3120

3014 2966

2867 2514 2611

Figure 1.1 Compiled from ONS Time Series Data. Loss of Potential Business: As factors such as cost push inflation and rising currency value add to the cost of production, there could be a potential loss in business in the manufacturing export sectors. The international buyers will simply switch to different suppliers and thus result in a potential loss of business for the UK manufacturing sector. The British economy is counting on these exports to reduce their trade deficits.
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Stock Rebuilding: The Manufacturing base faces added pressure from stringent fiscal policies such as the increment in the VAT & other such relevant taxes. The sector therefore could not rebuild its stock that it had lost during the recession due to lack of financial incentives. This implies that the sector will take longer time to meet the demands of exported products and thus make it less desirable.

3. Why will it be necessary for the manufacturing business to make significant changes to its operation in the near future? According to the EEF, the manufacturers organization, the manufacturing sector is very important to the UK when it comes to recovering from the recession. The balance of payments is dependent on this sector and their sustainable growth will definitely contribute to UKs economic well being. This sector accounts for almost 50% of Britains Exports. The manufacturing sector employs a sizeable amount of the middle class & mid- income labour and therefore its benefits will be well distributed across the UK. (www.eef.org.uk) Towards the final quarter of 2010, the manufacturing sector recorded an increase in growth rate of 0.6%, the highest in its sector. Since the labour market is directly affected by the manufacturing sector, it is essential that the balance be maintained to support growth. According to Markit economic research (Jan, 2011) the manufacturing sector showed signs of improvement that led to additional 20,000 jobs being created. Another incentive for the manufacturing businesses to make significant changes to its future operations could be the return of British firms to UK for production needs. The increasing unrest in the Middle East and the growing price of oil has made transportation of components much more expensive. Previously attractive labour costs are now on the rise and Inflation in the emerging markets has also made it difficult to establish a balance between price and quality of products manufactured overseas. According to the article in The Scotsman (February, 2011)

about 15% of British firms who chose to move overseas for their manufacturing needs have returned back to UK. Many firms are now reviewing their supply chains in order to make the most out of the recent favorable improvements in the manufacturing sector. The manufacturing output was at its record high of 61.49 as per the PMI in January, 2011. (www.thescotsman.scotsman.com) According to Michael Prest, of The Prospect Manufacturing survey, the British Government is also investing heavily in the Low- Carbon economy plan. This is concerned with the carbon footprint and the prospect of Economic growth and creation of over 2, 60,000 jobs by 2018. High value- added manufacturing has tremendous scope for improvements in UK as they also benefit the society in numerous ways. Some of them are mentioned below: Encourages R&D Favors distribution of wealth & its creation. Increases the number of skilled workforce. Beneficial to supporting industries as well. Uniform distribution of wealth as the work force is spread all across UK.

y y y y y

Considering the local trend, the manufacturing sector has definitely bounced back. The reduction in the value of the GBP has ensured the competence of British Exports in the global market. The manufacturing sector is also being counted upon to compensate for the losses generated by the construction sector. (www.guardian.co.uk)

Part 2 1. The significance of the Eurozone countries: From the analysis above, it is evident that the UK is dependent on its exports to a large extent. UK stood 4th in the World in 2010, in terms of volume of Exports. (www.visitbritain.org) However, in recent years, UKs major trade partners have been facing severe fiscal policy burdens. The Eurozone has been troubled by The Sovereign Debt Crisis. The following table gives a break-down of the volume of trade between Eurozone countries and UK in 2009/10 and the difference in volume of exports as compared to the previous financial year.

Table 1.0 Sourced from www.guardian.co.uk UK Exports to the Eurozone Exports 2009/2010 (Billions) 2.7 4.1 15.3 8.9 3.9 8.2 10.5 17.4 24.8 2.7 17.9

Country Norway Sweden Ireland Spain Switzerland Italy Belgium Netherland Germany Poland France

% Change -2.3 -19.4 -17.7 -10.8 -15.8 -12 -19.8 -10.3 -13 -8.2 -4.7

Note: Norway & Switzerland are not direct members of the Eurozone, However they are members of European Free Trade Association (EFTA)

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The Eurozone sovereign debt crisis has been a serious threat to UKs recovery from the recession as these countries are its major trade partners. Germany, France, Netherland, Ireland and Belgium are major importers of UK goods & services. The Eurozone therefore holds a high level of significance in this context. (Oxford Economics, 2010) The Eurozone sovereign debt crisis started with Greece defaulting heavily on its debts. UK also operates most of its exports via the European Central Banks (ECB). The pressure on the ECB to extend Greece with the much needed bail- out pressurized the banks further. The borrowing costs shot up, which along with weak foreign trade affected Britain further. As the world comes to terms with the collapse of the Greek economy, investors suspect the affect to spread to other European nations and hence pull out their investments. This leads to a major set- back to the Eurozone. Due to these reasons, other EU nations are pulled into the crisis and as a result, stringent fiscal policies, along with major cuts on imports are introduced which further affect UKs chances of a full economic recovery from the recession that started in 2008. (Oxford Economics, 2010) The European countries in 2010 provided a 95 billion bail out to Greece to avoid possible chances of another recession in European Economic Area (EEA). The debt crisis has triggered a series of actions such as wage, pension and public sector spending reductions. Greece also saw the imposition of higher VAT & taxes as well as increasing the age of retirement to counter the debts during this period. (www.guardian.co.uk)

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2. Why few European countries are doing better than others? Figure 1.2 below allows for comparisons between different countries in The Eurozone. It can be observed that countries that have been in news in recent times due to problems associated with debts have very little growth in GDP. Even though, the graph shows a declining trend between 2008- 2010, concession should be given to countries due to the recent economic downturn. Germany is clearly leading the EU countries with highest GDP, followed by France, Italy & Spain. (www.imf.org)

Figure 1.2

GDP (Current prices in US $ Billions) Compiled from International Monetary Fund

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Reasons why few countries in the Eurozone are doing better than others: The Eurozone has a blanket currency in the form of the Euro. This means that the major drivers of the European Union who perform well in the Global market have a direct influence on the currency value. The Germans in particular are adept at manufacturing and engineering sectors which consist of majority of their exports. Germany along with France, Spain and Italy has steadily helped revaluate the Euro for the better. However, the peripheral EU countries cannot live up to the same standards as the Germans and the rest and the inflated currency value makes their exports less attractive & expensive. This explains the difference in the GDP between these countries. (Oxford Economics, 2010) In the context of the case, during the European sovereign debt crisis Germany moved away from this blanket currency evaluation as the defaulters in the EU periphery like Greece & Ireland were driving the currency value down. By doing this, the Germans were able to increase the price of its exports and reap higher profits. This could be one of the reasons why Germany performed better amongst other EU countries. (Oxford Economics, 2010) Michael Porter in his book, the competitive advantages of Nations, analyses the situation using the Porters diamond of national advantage. There are certain factors that give countries a competitive advantage over others. Considering the case of Germany (as they are the major drivers of the EU in terms of performance) the factors that favor them the most are:

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Factor conditions: Competence in the form of technological- know- how, skilled workforce etc that help Germany in making exports attractive.

Demand conditions: Germany has fierce competition in the field of engineering and Technology and they are at the forefront of the same. The demand for these areas is high in Germany as well as foreign country, allowing for more R&D and investments in these sectors. This tends to create a national advantage for Germany.

Related & supporting industries: The construction sector of Germany supports the automobile industry in Germany. For instance, Autobahns in Germany produce local demand for high performance driven vehicles. This local demand in turn helps them keep pace with foreign markets.

Firm strategy, structure & rivalry: Germans are known for strict hierarchical organizations. Their efficiency and effectiveness due to this kind of control is reflected in their products and services which further testify their growth in the European Union on the whole.

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3.

Assurance over pace of UKs Economy over the US. The Foreign Exchange investors are much more comfortable investing in UK than in the US because of speculations about a double dip recession in the US. As compared to the UK, USAs rate of recovery is much slower as the consumers spending are declining. The US economy shrank by 1.3% in the second quarter of 2010. This implies that the return on investments for the foreign exchange investors would be much lesser as compared to the UK which is showing little yet steady signs of progress. Apart from this, the US banking policy of keeping very low interest rates further makes the market less attractive to these investors. (www.guardian.co.uk) According to a survey outcome of 31 economists conducted, The US faces a rising risk of a double dip recession of about 25%. (www.money.cnn.com).The unemployment rate during this period also shot up to approximately 9.5% in the US, causing concerns of further inflation. At the same time, the US exports are also falling and giving way to higher levels of imports. (www.bbc.co.uk) A combination of all these factors have led to increased uncertainties amongst investors and as a result of which investors are more in favor of investing in the UK economy as it shows comparatively a better promise of growth.

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Part 3 1. Why is the Service sector of UK at a bigger risk? The Service sector of UK contributed upto 75.8% of the GDP of the country in 2006. This translates to about three quarters of the Economies GDP. This sector is far more dominant than manufacturing industry as it contributes to the bulk of the countrys exports revenue as mentioned in the Blue book reports of 2010. (www.statistics.gov.uk) The service sector consists of: Business & Financial Services Government services Hotels & Restaurants Education Health Social Public administration Defense services Real estate Transportation Communication Retail trade Tourism Other services (Hair dressers etc.)
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y y y y y y y y y y y y y y

UK Financial services especially in the fields of banking and insurance are the front runners on the list. The gross value added by this sector in 2008 was 420 billion. The tourism industry is also very important to the UK. It has been ranked 5th in this department over 50 nations. (www.visitbritain.org) According to a report by Delloitte & Oxford Economics, the UK Tourism sector is expected to grow from the current 16 billion to 31 billion by the year 2020. The sector may also support job openings of upto 264000 vacancies by 2020. Another industry closely linked to the Tourism sector is the Hotels & Restaurants sector. According to the Blue book report of 2010, this sector generated revenues of approximately 184 billion in 2008. Figure 1.3 Gross value add to UK Economy by sector (2008) Sourced from: the Blue book 2010. (ONS)

Billion
Education, Health, social 170 184 Financial Services Hotels & Restaurants 420 150 Manufacturing

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Similarly, the contribution of other service sectors including education, health & social services amounted to 170 billion. In comparison to the service sector, manufacturing sectors contribution to gross value was only 150 billion in 2008. This goes on to show why the Service sector is highly significant to the UK economy. However, in mid 2010, the PMI showed a declining trend for the service sector which is a matter of concern as the UK is counting on this sector to help oversee a full economic recovery. The PMI declined to its 53.1 in July 2010, the lowest recorded PMI since July 2009. According to economists, the service sector is at risk due to the austerity measures adopted by UK and its stringent fiscal policies. The increments in tax, VATs & other such impositions have seen the prices rise from 51.1 to 51.3. This implies that the service charges are being passed on to the consumer in order to keep a healthy profit margin. The amount of raw materials being purchased by the service providers have also fallen as per the PMI survey reports. (www.telegraph.co.uk) The adverse weather condition in December 2010 brought the service sector PMI to 49.7 which translate into contraction of the economy amidst fears of the return of recession. The PMI later recovered to 54.6 in January. (www.guardian.co.uk) Supermarket sales also were showing a declining trend with most of the consumers switching to heavy discounters such as Aldi & Lidl. The Heavy discounters witnessed a surge of 13% in sales in February as consumers are now spending less in the face of high inflations and uncertainties. (www.cityam.com)

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The Governments austerity budget plan have definitely curbed consumers spending power in the UK and as such is the principle reason for the service sectors declining performance & therefore at risk. 2. What does Market PMI mean and how can it affect the UK businesses? PMIs are economic indicator surveys and short for Purchasing Managers Index. This managed by the Institute for Supply Management and includes feedbacks from over 400 purchasing managers across the country. The major areas identified for the survey by PMI are as follows: y y y y y Level of production Incoming orders from clients Speed of delivery of raw materials and supplies Inventories Levels of employment. The surveys can be answered using three options, better, worse, or same. Based on the survey population, these are then assessed based on the choices marked by the purchasing managers and compared against the previous month. The scale of measurement is from 0 to 100. Any figure above 50 depicts growth in the surveyed object. (Institute for Supply Management, 2010) How can it affect the UK Businesses? PMIs are indicators of growth in the surveyed sectors. This implies that the Investors are constantly looking this up in search of prospective investment

19

opportunities. These investments can obviously affect the development of the concerned industry based on the survey results. Economists may be interested in time for delivery of supplies and raw materials and price paid to keep a track on the inflation in the markets. Shareholders are also interested in the PMI data as the share values can increase or decline based on the data outcome. The Businesses capacity to raise capital and their goodwill in the market may be affected with negative outcomes of PMI Survey. (Institute for Supply Management, 2010) The PMI has been helpful to UK manufacturing & Service sectors. Since the PMI figures are volatile at the moment in both sectors, the UK Government has not raised the interest rates as yet, which had been lowered in recent years due to the economic downturn. For UK to keep bank on its competencies, it is essential that they skim the market for possible opportunities that may reflect a trend. Corrective measures can then be introduced based on the market research data. UK can maintain its International competence in the global market through the use of the PMI as well as other such external surveys. (Daniels, J.D. et al, p. 394)

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