Manufacturing sector leads UK’s race to recovery

Latest Red Flag Alert Report for Q1 2012

The most recent Begbies Traynor Red Flag Alert research, published today (20 April), which monitors a series of indicators of UK company distress, shows that manufacturing is recovering against a tide of continued business distress across the country that is affecting many sectors.

 
The underlying year-on-year trend showed a welcome fall of 17 per cent in combined distress - when compared with the same period in 2011 - which indicates early progress away from another recession.

However, seasonal trends consistently show increased levels of distress in this quarter after the pre-Christmas retail and leisure spending peak. Combined instances of UK business distress again followed this pattern, rising 55 per cent in the first quarter of 2012, compared with the previous three months, indicating the potential fragility of the recovery.

Winners

Among business sectors that showed positive results, according to the Red Flag Alert research, the manufacturing sector as a whole led the way with very pronounced year-on-year falls in combined distress: food and beverage producers’ distress fell by 37 per cent; print and packaging firms saw 73 per cent fewer instances of distress; and other manufacturing businesses saw distress levels fall by 49 per cent.

“Manufacturing is the star of the economy at present and the engine that could drive a recovery. Indeed food and beverage manufacturers were the only sector to see falls in both year-on-year and quarter-on-quarter distress,” said Julie Palmer, partner at Begbies Traynor.

She added: “Key manufacturing centres, including London, Manchester and Birmingham have seen falling critical distress over the past quarter when compared with the previous three months, and also compared to a year ago.”

Losers

Significant problems in the property services sector (which showed a 122 per cent increase in distress) and the construction sector (which showed a 104 per cent increase in distress) in the first quarter of 2012, indicate that while private sector manufacturers are leading the green shoots of the economy, public spending cuts are still hitting many companies hard as long-term infrastructure and construction contracts are being held over or shelved.

Ric Traynor, chairman of Begbies Traynor Group said: “We have seen numerous construction firms, contractors and suppliers restructure or withdraw from markets recently, and there are concerns that the impact of the sustained spending freeze on this sector is being masked by the fact that many sub-contractors are not immediately counted in government unemployment numbers.

He added: “There is a great deal of consolidation and contraction still to come in this sector, and this will leave the UK short of capacity when the spending constraints loosen and projects are back on the horizon again.”

Critical problems in food and drug retailing increased by 43 per cent, against an average fall of 7 per cent in the first quarter of 2012, compared with the same period for 2011. 

Julie Palmer commented: “Tough seasonal trading conditions usually create quarter-on-quarter increases in distress in January, February and March each year. Some sectors such as retailing and construction are yet to see improvements, but the overall fall in distress compared to 12 months ago is a sign of some momentum towards overall recovery.”

She added: “Retailing continues to see high levels of distress in a traditionally difficult quarter following the annual Christmas spending peak. This is evidenced by the likes of Game going into administration, and by the 0.8 per cent drop in retail sales volumes between January and February this year. It is extremely likely we will witness more high profile retail failures, as well as increased consolidation and restructuring across the retail environment in the next two quarters.”

Other sectors dependent on discretionary spending, such as the licensed trade, leisure and the travel industry, continue to have a difficult time with considerable increases in business distress. Ongoing job insecurity and a desire to pay down personal debt have led many consumers to reassess their outgoings, with many people choosing the cheaper options of drinking at home rather than at their local pub; cancelling gym memberships; and opting for a staycation rather than foreign holidays.

Ric Traynor concluded: “Although business distress levels are up 59 per cent from the last survey of Quarter 4 2011, the overall year-on-year total of instances of combined distress is down 17 per cent, a welcome sign that the manufacturing sector, aided by low interest rates and a competitive pound, is leading the economy gradually back towards improved financial health.

“Generally the liquidity of firms is increasingly polarising. Many companies are hoarding cash reserves and these are ironically the businesses best placed to secure borrowing from lenders. On the other hand there are many good businesses whose growth is constrained by their cash-flow pressures and a continuing shortage of debt funding. Improving the availability of working capital to the future stars of the economy is going to be critical to the momentum of any fledgling recovery. We still expect to see some volatility in quarterly Red Flag Alert Surveys over the next 12 months.”

Critical problems by Sector: