Businesses still need a further cut in interest rates

Oct 13 2008 By Duncan Tift, Business Staff

The decision by Wagon Industries to ask for a suspension in the trading of its shares is a body-blow to the region’s manufacturing sector.

And it may well be the final indication that the industry has now entered recession. Its exposure to the automotive sector – ironically for so long its strength – has finally proved to be its weakness.

Motor manufacturers the world over are experiencing serious problems. Demand is falling, significantly in the established markets of Europe and the United States, but now it appears that the safe harbours offered by the emerging economies of Asia, Latin America and Eastern Europe may no longer be the saviour of hard pressed carmakers as demand is declining here as well.

If the difficulty securing credit continues then the appeal of a shiny new motor will become the preserve of the ultra-rich, leaving the volume market floundering.

Not a comforting thought.

Manufacturers are trying to be positive but I’m sure that many will privately be hoping they don’t share the same fate as Wagon.

So what needs to happen if they are not?

The fall in factory gate inflation last month is an encouraging sign and hopefully it will strengthen the claims for a further reduction in interest rates before the year is out.

The Monetary Policy Committee will be hoping that its 0.5 per cent reduction will ease the worries of many people who see nothing but the looming prospect of a lengthy recession.

While a step in the right direction, a further fall must surely follow.

Midland manufacturers struggling to compete against foreign competition need every weapon at their disposal and a four per cent base rate would surely bolster the arsenal – although many might claim they won’t be able to compete on a level playing field until the figure is closer to three per cent or even less.

The Government’s bold action to take a stake in some of our leading banks may provide the bulwark the economy needs and if it encourages banks to begin lending again then the move will have been a step in the right direction.

But any investment needs to be carefully targeted – it is pointless using taxpayers’ money to bail out banks if in turn that money is only used to prop up already failing firms.

We have to be creative in investment and try and spot innovative trends and developments in the market that will enable manufacturers to stimulate real growth and add value not just to their own business, but the wider economy as a whole.

Now is the time for manufacturers (and other companies for that matter) to look to the future and plan ahead so that when the economy turns – and it will – they are prepared to capitalise.

Investment in new plant and employee training is vital – developing a new generation of skills to preserve the good name of British manufacturing is essential.

It is only when our backs are truly against the wall that we discover what we are really made of.

If this is to be our darkest hour then the preparations should begin now.