British manufacturers are so far surviving the credit crunch with banks still lending to industry at competitive rates even as commodity prices soar, the head of the Engineering Employers' Federation told Reuters on Monday.
A recent fall in the sterling effective exchange rate is also proving broadly positive for the sector but Martin Temple, EEF director-general, said companies are increasingly concerned about the outlook for this year.
"Companies have told us that, surprisingly, they haven't been affected by it (credit crunch)," Temple told Reuters in an interview. "We keep thinking it will tighten up but it hasn't happened. The banks are giving them quite competitive rates."
"But there's a nervousness in the air for 2008 - about how difficult it will be." Most experts expect the global economy to cool this year as tighter lending conditions and financial market turmoil eat into demand, potentially cutting the appetite for British goods abroad.
Manufacturers also face a tough time protecting profit margins as energy and raw materials costs rise sharply. Temple said companies had got better at dealing with swings in those costs but said pricing power was still suffering. "They have got a real squeeze on margins," he said. "There's no doubt they are not able to pass on the full impact."
But Temple said companies were currently enjoying healthy orders and some respite from a weaker pound, although a strong pound had helped to offset some commodity costs. "It's (sterling) favourable at the moment," he said.
In a speech in London on Monday, Bank of England policymaker Timothy Besley said a lower exchange rate was threatening to drive up domestic inflation while tighter credit conditions were threatening growth, making setting interest rates difficult. "We might expect a significant reduction in consumption growth over the coming months," Besley said.