Cambashi's main scenario shows UK EUE (External User Expenditure) on MDA rising by 2% in 2001 from 2000. We would expect UK CPC/PLM EUE to grow by about 15%. The main assumption made is that UK manufacturing output will grow by 0.5% in 2001 while manufacturing investment in plant and machinery will increase by 2%.

According to UK economic outlook (PwC) :

• Manufacturing output grew by only 1.1% in the year to March 2001 and actually fell 0.7% in the first quarter. The overall purchase managers index has fallen from 60 in July 2000 to 52 in May 2001. However, the manufacturing purchase index now indicates falling output, and a reading of 46.4 signals further falls in output. The CBI survey also indicated a sharp fall in business confidence in March.
  
• Investment growth in the whole economy slowed from a peak of over 10% in 1998 to only 1.8% in the first quarter of 2000. It has since strengthened to 5.7% in the year to March 2001, however much of this investment expectation is driven by the planned rise in public expenditure and will not benefit manufacturing directly.

Cambashi's other scenario is a "hard landing" based on PwC's "global hard landing" scenario. In this case UK MDA EUE would shrink by 5% but UK CPC/PLM EUE would continue to grow by about 10%. If this occurred, lower world trade growth would cause the UK manufacturing output to fall by 1%. The main factor in this prediction is primarily a US economy that continues to underperform, leading to lower demand due to a lack of consumer and business confidence.

A report in last week's Computer Weekly has identified a link between growth in UK GDP and growth in all IT expenditure. Analysis of the Kew Associates IT spending survey - a highly regarded industry sector report based on user interviews - and application of econometric methodology from Cambridge Econometrics suggests that next quarter's growth in IT spending will be 3.7 times this quarter's growth in GDP. Both of these figures represent the whole economy, not just the manufacturing sector. However, the model does break down in exceptional circumstances, such as the preparations for Y2K.

Studies by Cambashi in the early 1990s suggest that in a mature market, such as MDA, the rate of growth in expenditure on that application is proportional to the growth in investment in plant and machinery in the same sector, in this case manufacturing. The analysis does not apply to fast growing markets such as CPC, where investment in new methods of cost and time savings continue even in a downturn. However, changes of direction in the economy take their toll even in these fast moving markets. In our hard landing scenario above, we would expect one and a half quarters of investment hesitation causing the lower figures.

The main problem with forecasting is discontinuities. When analysts look at trends and extrapolate, they forecast rather well. However, if the laws of the market change, extrapolation doesn't work. In addition to the Y2K effect mentioned above, there are two other current discontinuities: the dramatic change in the price performance of many internet enabled applications; and a possible sudden collapse in consumer confidence and demand. At the moment our forecasts are based around a main scenario of gradual recovery from today's low base in the US economy, and a later recovery in Europe and the UK. Nevertheless, the halt in investment caused by lack of confidence could indicate that the global hard landing has started.

Very recent information suggests that all manufacturing investment may have come to a full stop, hopefully temporarily, from the end of May 2001. If so, this is a very unusual occurrence that does not directly compare with experience of the early 1990's recession when expenditure gradually petered out. In that recession CADCAM EUE fell by 9% in 1992 compared with the 1990 peak. In this recession, over investment rather than over heating is the cause. It is more like the Japanese bubble than the Western recessions of the post war period.

On the whole we still prefer our main scenario. However, the risks are on the downside rather than the upside.

Mike Evans
Senior partner, Cambashi

New in April 2002: Cambashi's UK CAx (CAD/CAM/CAE) Review

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