The UK drives to better business confidence

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The latest surveys for the UK economy show improvements in manufacturing and business confidence, with a slowdown in consumer confidence. Overall, the EU Commission's indicator for UK economic sentiment rose, despite the changes to the consumer outlook.

The EU Commission drew attention to the 'markedly improved sentiment in the largest non-Euro area economy, the UK' in its press release on the February figures. It is compatible with our view that the UK will grow reasonably well again this year.

Business confidence has risen because demand has held up well over recent months. Businesses are also finding that at the current level of the pound against the dollar and euro, there is more demand for their products, both as exports and to replace imports that have just got dearer.

It is as you expect, given the way the pound fell for a year and half until the end of 2016, with a few rallies on the way.

CAR PRODUCTION

One of the export success stories has been in automotive manufacturing. Last year produced a new high for UK vehicle output this century, at 1.72 million. Most of those went for export, as UK car buyers had a strong preference for imported vehicles.

The leading UK-based manufacturers, Nissan, Jaguar Land Rover and Mini, are overseas-owned, so there is no major quoted car manufacturing sector in the UK.

The UK-based car plants nonetheless create good jobs and use local services in the UK. They also provide an opportunity for UK car component companies to supply them.

Global engineering group GKN's figures this week remind us that the UK market still has a large world-class quoted automotive company, producing many of the drivelines for vehicles assembled around the world.

GKN's figures showed good growth in revenues, thanks to recent acquisitions and to decent growth in its main automotive products. GKN is innovative, seeking to strengthen its leading position in gear boxes and axles with new products.

It has improved its four-wheel drive range, announced a two-gear axle to boost electric car performance, and pioneered solutions for the delivery of power to the wheels of electric cars. It sees electric vehicles as a fast growth area for the future.

At these levels of the pound relative to other currencies, the UK-based car industry will be looking at what else can be sourced from UK component makers to reduce the present high dependence on imported parts.

There are plenty of opportunities for manufacturing investment in expanding capacity and improving the range of products the UK makes.

Watching the daily publication of large company figures, they are on average showing good profits growth and substantial cash generation. They also often show a wish to increase dividends and buy back their own shares, rather than committing more capital to expansion.

Maybe given the scope to replace imports with domestic output, and the competitiveness of some export products from a UK base, more will come to see the advantages of reinvestment.

John Redwood is chief global strategist at Charles Stanley.


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