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Bill Jamieson: Sterling kills Scots manufacturers

Sterling recently hit a near five-year high against the dollar on the currency markets. Picture: Getty

Sterling recently hit a near five-year high against the dollar on the currency markets. Picture: Getty

  • by BILL JAMIESON
 

OVER the past two years, I feel as if I have fallen into a deep and sustained hypnosis, writes Bill Jamieson

Indeed, most of Scotland seems to be under a hypnotic spell.

It will last until 19 September. Then we will hear a loud snap of the fingers, when we will suddenly awake to ask in a cacophonous outpouring of confusion, disbelief and panic, one question above all: where do we go from here?

So dominant has been the independence referendum issue that it has pushed other pressing matters to the sidelines. Let’s not delude ourselves that this has been without cost. Forward planning has been impossible. Business decisions have been postponed, investment put on ice and expansion deferred until The Vote. In these two years of navel-gazing, the business world has moved on. But the imperatives for our economy and our businesses remain: the need to internationalise, and the imperative to export.

This week key decision-makers and some 400 business leaders gather in Dunblane for the Scottish Manufacturing Conference. Organised by Scottish Enterprise and supported by the Bank of Scotland, it’s a showcase for businesses across all sizes and sectors in manufacturing. But it will also be a searching forum where senior figures in the business world will assess prospects for the year ahead – and especially the outlook for exporting in a world that looks to have reached an important inflection point in the past week.

In the Eurozone, a key area for Scottish exporters, the European Central Bank has taken action in a bid to stave off the looming threat of deflation and pump some oxygen into a desperately poor Eurozone economic performance. Around the world other regional blocs have been accelerating into an upturn. The European single currency area, with the predictable exception of Germany, has not. Its economies continue to wrestle with massive debt overhang, austerity policies and appalling levels of unemployment.

The ECB action to cut official interest rates – and even move deposit rates into a penalty zone – is designed to boost bank lending to business. It may also have the effect of weakening the euro against other currencies. That doesn’t sound too good for companies here seeking to boost their Eurozone exports.

What makes this doubly worrying is that we may have an interest rate rise to contend with early next year, and possibly this side of Christmas if consumer spending continues to expand at its current pace.

But United States non-farm payroll figures late on Friday showing a 217,000 growth in jobs in May – the fourth month in a row of gains – gave support to the view that, after a weather-hit first quarter, the American economy is now gaining real traction.

It is never good for us to rely on external influences and a soft currency to help our manufacturing base. The real heavy lifting has to be undertaken by us in productivity improvement, efficiency gains, adaptation and innovation. Here we can learn a lot from what successful companies are doing – and this is what makes the work of the Scottish Manufacturing Advisory Service so vital.

But we badly need to see a reversal in the strength of sterling. So little wonder conference attention this Thursday may be focused on developments in markets beyond Scotland, because our manufacturing sector urgently requires a fillip right now.

The pace of growth of output in both services and manufacturing in Scotland fell back in April. And the latest Purchasing Managers Index survey evidence shows that new export orders for Scottish manufacturers have now fallen for three consecutive months.

While the headline PMI output index for the Scottish private sector economy fell from 56.4 in March to 54.8 in April and is well above the level of 50 which indicates expansion, the latest Scottish PMI output index reading was well adrift of a corresponding figure of 59.2 for the UK as a whole.

Also, the gap between the output growth rates in Scotland and the UK as a whole widened significantly between March and April.

Bank of Scotland chief economist Donald MacRae will be speaking at the conference and I expect he will flesh out the latest PMI signals showing an easing of private sector growth. The bank’s report for May due this week is expected to show further solid expansion but a loss of growth momentum from the rapid pace earlier this year. There is still growth – and positive signals in the numbers. But is the latest sign of slowdown just a passing phase or indicative of something more troubling?

In the recent past he has signalled the strength of sterling as a possible contributor to the fall in new export orders. The recent behaviour of sterling in currency markets has seen it hit a near five-year high against the dollar, raising worries that its strength could kill off any broadening of the economic recovery.

It is just this sort of currency resurgence, working to drive up the costs of goods and services we sell overseas, that puts a question mark over hopes for the export-led recovery that we desperately need to see.

And that is a worry, given our dire balance of payments performance. Last year saw an eye-watering current account deficit of just over £71 billion, equivalent to 4.4 per cent of GDP and close to the all-time record scored in 1989 – just before the onset of a sharp recession.

The latest figures have shown a marginal improvement. Can we build on this? It will be interesting to hear MacRae’s views on where he thinks the pound will go from here.

Meanwhile, the focus of the conference will be on success stories and what companies can learn through developing their supply chains, culture, people and leadership skills. Full details of the conference are available at scottishmasconference.co.uk. See you there. «

 

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