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Oh damn. We got just what we wished for

Foreigners complained that America was presiding over an era of too-easy credit. Complain no more

BACKGROUND

• Economist says US could plunge into recession

• City faces tough times as recession threat grows and era of easy money comes to an end

• Middle America will continue to feel the pinch

• Wall Street braces itself for more sub-prime misery

• Squeeze on Middle America worst since 1950s

Rocked by an event that nobody foresaw

David Smith reviews the economic year and looks at how the sub-prime crisis changed everything in the financial markets

Related Links

• Fears over force of credit squeeze

• Pound’s recent fall raises the spirits

Gordon Bridge started planning a £7 million extension to the AESSeal factory in Rotherham on a sunny June day, unaware of the gathering storm clouds of a worldwide credit crunch. Six months later, as a chill wind whipped through the South Yorkshire town, the first spade went into the turf for the building of the plant, which is to be completed later this year.

Mr Bridge is the chief executive of AESSeal, a small but fast-growing business that designs and manufactures mechanical seals. He is not concerned about the credit crunch and had no hesitation in pressing the button for the company’s factory expansion, two weeks before Christmas. “It was a very positive decision,” he said, even though the US is his biggest market. “We feel very confident about the growth prospects of our company.”

Founded in 1981, AESSeal now employs 1,000 people – half of them in the UK and the rest in 30 countries worldwide. If anything, a strengthening dollar in the months ahead will boost Mr Bridge’s business.

AESSeal’s new production unit will provide room for growth over the next three years and turnover is set to double from £72 million by 2012.

Mr Bridges is not unrealistically optimistic - he has the necessary funding and a ready and willing workforce. “I think that we are in danger of talking ourselves into a recession,” he said. “If we just get on and run the business to the best of our ability, we will do well.”

The happy picture in Rotherham is repeated in hundreds of manufacturing businesses across Britain, which has 3 million people employed in manufacturing, which represents 16 per cent of GDP. Mike Turner, chief executive of the defence company BAE Systems, one of the UK’s biggest manufacturers, also sees no infection from problems in the financial system. “Frankly it’s not an impact on our business,” he said. “I don’t see how the credit crunch can [damage] a company that generates so much cash.”

The automotive industry, which should next week reveal final figures for its 2007 sales, is also chipper. Almost 2.4 million new cars were registered last year, historically a high level. The forecast for car sales in 2008 is flat or only slightly lower.

Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders, thinks that the credit crunch will make little difference to the fortunes of carmakers in the UK, which directly employ about 162,000 people. He said: “We have world-class companies operating globally and winning business globally. They are being successful and investing in skills, technology and innovation. The time has come for a revaluation of the manufacturing sector in the UK.”

British manufacturing companies experienced the strongest trading conditions for more than a decade in 2007 and many are confident that uncertainty over credit is not going to affect their plans.

However, some will experience declining domestic demand. “It’s likely that the very strong growth the sector has enjoyed is fading a little,” Ian McCafferty, the CBI’s chief economic adviser, said. “Manufacturing is not going to be the epicentre of a slow-down, but there will be some impact.”

A recent CBI survey of small businesses, which was conducted in November, also showed that just under a third of companies had experienced changes in their access to credit.

The EEF, the organisation representing manufacturers, is also hearing confidence from its members, particularly for the first few months of the year, but says that there is some uncertainty about the second half of the year. “Manufacturers won’t feel the impact of the credit crunch directly, but life will be more difficult,” Stephen Radley, the EEF’s chief economist, said.

Another factor is the rise in energy costs. Jeremy Nicholson, of the Energy Intensive Users Group, which represents big manufacturers such as Corus, the steelmaker, Castle Cement and Rio Tinto Alcan, the aluminium producer, said that prices in the UK remain high compared with competitors worldwide. However, manufacturers cannot undermine their competitiveness by passing these on to customers. If oil prices stay at about $100 a barrel for a long period, energy prices will continue to be a problem. Increasing environmental legislation is also a growing challenge for manufacturers.

These challenges may be small, but they could become more significant in 2008. For Alphasteel, a tiny steelmaker in South Wales, the storm clouds could no longer be avoided. It went into administration just before Christmas, after its Swiss parent finally withdrew financial support.

Making it
Britain’s ten top manufacturers by sales

Unilever £26.7 billion
GSK £21.7 billion
AstraZeneca £12.2 billion
BAE £11 billion
Corus £10.1 billion
Ford £9.9 billion
British American Tobacco £9.3 billion
SABMiller £7.8 billion
Diageo £7.2 billion
Rolls-Royce £6.6 billion

Source: CBI

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