Surprising rebound in UK manufacturing

February 6, 2012 by Nigel Tree

Good news for the UK manufacturing sector. Output expanded in January at the fastest rate since March 2011. There was an increase in new orders together with a stabilisation in employment. Also, average input prices fell for the third month running causing an easing in the cost pressures which had been facing the sector.

The improvement in manufacturing may help prevent another recession.

These findings are from the Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) which rose to an eight-month high in January of 52.1, compared to 49.7 in December. Any figure above 50 shows that the sector is in expansion mode.

According to the survey companies reported an increased willingness to spend among some UK clients and a further increase in new export orders. There were reports of improved export orders from Brazil, China, the Middle East and the US.

Rob Dobson, Senior Economist at Markit pointed out that: “Growth is nowhere near the surging highs of 12 months ago, but this is nonetheless a vast improvement on the 0.9% reduction in output seen at the end of last year. Manufacturing was a key area of weakness which caused the UK economy to contract in the final quarter…”

The employment picture was broadly unchanged in January, but whilst some of the larger companies were still cutting jobs there was actually an increase in employment at small and medium-sized enterprises. As we can expect these to be some of the more dynamic firms in the sector, this is decidedly good news.

Also, the improvement in the sector as a whole gives us a degree of optimism that the UK economy can avoid falling back into recession.

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January 31, 2012 by Nigel Tree

Latest figures released this lunchtime show that consumer prices in the OECD area rose by 2.9% in the year to December 2011, compared with 3.1% in the year to November 2011. This easing in the annual rate of inflation mainly reflected the slower growth in energy prices, which increased by 8.1% in the year to December, down from 11.6% in the year to November – the lowest annual rate since November 2010.

Price inflation brought down by lower growth in energy prices

Food prices rose by 4.4% in the year to December, compared with 4.1% in the year to November. Excluding food and energy, the annual inflation rate was stable at 2.0% in December.

Consumer prices, selected areas

December 2011, percentage change on the same month of the previous year

Source: OECD

In Japan consumer prices fell by 0.2% in the year to December; the third straight month of decline. Annual inflation remained stable in France (at 2.5%) and Italy (at 3.3%) and decelerated sharply in the United Kingdom (to 4.2% down from 4.8% in November) and in Canada (to 2.3% down from 2.9% in November). It also slowed in the United States (to 3.0% down from 3.4%) and Germany (to 2.1% down from 2.4%).

Euro area annual inflation (as measured by the HICP) decelerated to 2.7% in the year to December 2011, compared with 3.0% in November

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UK GDP falls in the last quarter of 2011

January 25, 2012 by Nigel Tree

UK GDP shrank by 0.2% in the final three months of last year, according to figures just published by the Office for National Statistics. This is the first fall since the last quarter of 2010. Most economists had expected a drop of 0.1%, although this is only a preliminary estimate and may well be corrected at a later date.

The UK economy is showing further signs of fragility

The reason for the fall was that output in the production industries decreased by 1.2% in Q4 20111, compared with an increase of 0.3% in the previous quarter. Construction sector output also fell by 0.5%, compared with an increase of 0.3% in the previous quarter. Also, service sector output was unchanged in the fourth quarter, following a 0.7% rise in the previous quarter. One factor which may have contributed to the fall was the concerted strike action in the public sector in November, which saw the loss of almost one million working days.

Overall, the UK economy grew by 0.9% in 2011. Yesterday, the International Monetary Fund reduced its UK growth forecast to 0.6% for 2012, from the previous forecast of 1.6%.

Whether GDP declines again in the first quarter of this year, which would mean the UK would technically sink back into recession, remains to be seen. Much of what happens to the economy depends on levels of confidence.

If consumers are worried by these figures and the continuing rise in unemployment, they may hold onto their cash rather than spending. Firms will also be wary about initiating new investment and GDP may continue to fall further. A major concern is what is going to happen in the eurozone and this is a further drain on confidence in the markets.

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Government borrowing continues to fall

January 24, 2012 by Nigel Tree

Government borrowing in December fell by £2.2bn from £15.9bn in December 2010 to £13.7bn. This means that borrowing has now fallen for four consecutive months.

The figures for the last financial year together with the current financial year are shown below. These are shown using the so-called “ex-measures” which exclude the temporary effects of financial interventions.

Cumulative public sector net borrowing (ex measure)

Source: ONS

It would appear that the Chancellor is on course to reach his target for government borrowing this year of £127bn, with the current total so far having reached £103.3bn.

The current improvement was due to higher government tax receipts and was helped by the levy on financial institutions plus the increase in VAT to 20% in January 2011. There was also a fall in central government spending of 0.09%.

The diagram below shows the current net debt situation.

Net debt as a percentage of GDP excluding financial interventions

Source: ONS

The diagram shows that current net debt has risen from 59.4% UK gross domestic product in December 2010, to 64.2% in December 2011. Although the government is reducing its borrowing, it is still adding to the total amount of debt outstanding every month. Current net debt now stands at £1.004 trillion.

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One in six families sold their second car in 2011

January 16, 2012 by Nigel Tree

This is according to Bridgestone, the tyre maker, who surveyed 2,000 UK families. This was principally due to the continued rise in fuel prices, but was also influenced by insurance costs and the general rise in the cost of living.

The survey also found that many more families may be forced to take similar action this year, with over 90% of families saying that they are ‘seriously thinking’ about selling their second car.

On top of this, seven out of ten respondents said they were using their cars less, and 50% said that they were no longer filling up their tanks.

Andy Dingley, Marketing Manager for Bridgestone UK, said: “Rising fuel prices mean that a large proportion of the family wage is spent purely on things like petrol, gas and electricity. But with prices increasing faster than the rate of people’s incomes, families are having to make extremely difficult decisions.

Higher petrol and other prices are starting to have a major influence on consumer spending patterns.

“The balancing act for a family nowadays does not leave much room for manoeuvre financially which can have a knock on effect on people’s peace of mind.

“This affects every part of people’s lives – including how and when they drive.”

Motorists are also looking at other alternatives to petrol driven cars, and two-thirds said that they would consider electric cars. Have they not seen the price of electricity?

Figures published by the OECD at the end of last week show that in the 3rd quarter of 2011, UK private consumption fell by 0.1 percentage points, following the same decline in the 2nd quarter. This is no surprise as the current austerity programme begins to bite.

What is interesting is how this will affect demand for different types of goods. Items which might have had a fairly low elasticity of demand are now becoming more elastic, as consumers start to reprioritise which goods are vital and which are not. Petrol and car ownership are obviously being newly categorised in this way.

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Most major economies still in slowdown mode

January 13, 2012 by Nigel Tree

The OECD has just published its latest growth forecasts, and the outlook is not great.

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue pointing to a slowdown in activity in most OECD countries and major non-member economies.

The assessment is little changed compared to last month for most countries. The CLI for China has deteriorated since last month and is pointing to a slowdown in economic activity towards long-term trend. For other major economies and the Euro area, the CLIs continue pointing to slowdowns.

No sign of take off yet for UK economy

The only good news is that the CLIs for Japan, United States and Russia are showing stronger signs of a positive change in momentum and remain above long-term trend.

The US also announced very positive job figures last week. Unemployment is at its lowest level since February 2009 and 212,000 net jobs were added in December. However, the meltdown in the eurozone and the slowing of the Chinese economy do not augur well for the UK’s prospects.

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Inflation continues to fall

December 14, 2011 by Nigel Tree

Consumer Price Index (CPI) inflation has fallen for the second month running to reach 4.8% in November, from 5.0% in October. There was also a fall in the Retail Prices Index (RPI), which includes mortgage interest payments, to 5.2% from 5.4%.

Increased supermarket competition has helped lower the inflation rate

Factors accounting for the fall in the rate of inflation include a slowdown in food and non-alcoholic drink prices, increased price competition by supermarkets and lower petrol costs. But the CPI figure is still well above the Bank of England’s target rate of 2%. Fortunately, there are factors already in place which will see the inflation fall early next year, especially the fact that the rise in VAT which came in last January, will move out of the annual comparison. There should also be a fall in food and energy inflation, and some forecasters believe that CPI inflation will fall to 3% by the end of the first quarter. The Bank has forecast that the figure will drop to 1.5% by the middle of next year, but that may well be unduly optimistic.

Energy prices are currently rising at an annual rate of 20.9% according to the ONS, which is the fastest rate of increase since February 2009. We also need to look at the comparison between a 5% current inflation rate and average earnings growth of 2.3%. This means that most households are suffering a continuing fall in real incomes. Given that consumer spending makes up about two-thirds of all UK spending, this is not going to be a driver of economic growth.

When we add this effect onto the cuts in public spending and our poor export performance, we may well see the economy dipping back into recession next year.

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Record gap between rich and poor

December 5, 2011 by Nigel Tree

The gap between rich and poor in OECD countries has reached its highest level for over 30 years, and governments must act quickly to tackle inequality, according to a new OECD report.

Inequality has increased in OECD nations

“Divided We Stand: Why Inequality Keeps Rising” finds that the average income of the richest 10% is now about nine times that of the poorest 10 % across the OECD.

The income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.

In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, the highest in the OECD, but this gap has finally started dropping.

Income inequality is much higher in some major emerging economies outside the OECD area. At 50 to 1, Brazil’s income gap remains much higher than in many other countries, although it has been falling significantly over the past decade.

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International trade growth grinding to a halt

December 1, 2011 by Nigel Tree

Merchandise trade growth slowed strongly in most major economies in the third quarter of 2011, according to figures just published by the OECD. Total imports of G7 and BRICS countries contracted by 1% in the third quarter, compared to 4.2% growth in the previous quarter. Total export growth slowed to 1%, compared to 4.6% in the previous quarter.

Serious fall in trade growth in 3rd quarter

Merchandise trade contracted in all major European economies, with falls in both exports and imports recorded in Germany, France, the UK and Italy. In the United States, imports contracted by 2.7% and export growth slowed to 2.5%, compared to 3.6% in the previous quarter. Export growth in China slowed sharply to 3.2% compared to 10.1% in the previous quarter while import growth accelerated slightly to 2.8% compared to 0.9% in the previous quarter.

In Japan merchandise trade increased strongly partly due to a technical rebound after the earthquake disaster. Exports also grew strongly in Canada but import growth stalled. Merchandise trade also stalled in Brazil, India, Russia, and South Africa.

If trade is an engine of growth, it looks very much as though the engine is stalling. More signs that we are slipping back into another global recession.

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UK to experience double-dip recession

November 29, 2011 by Nigel Tree

In its latest Economic Outlook, the OECD forecasts that both the UK and the eurozone could see a double-dip recession over the next few months. The organisation has slashed its forecast for UK growth in 2012 to only 0.5%. It also believes that growth in the current quarter could be negative at -0.03% and in the first quarter of 2012 at -0.15%. Two consecutive quarters of negative economic growth is the recognised definition of a recession.

The only way is down for the UK economy

The eurozone is expected to fare even worse with a forecast growth of only 0.2% for the whole of 2012, and to shrink by 1% in the final quarter of this year and 0.4% in the first quarter of next year.

The OECD also expects global economic growth to be 3.4% in 2012, a figure which has been revised down from the previous 3.4%.

Yesterday, Mervyn King, governor of the Bank of England, also painted a dismal picture of the UK economy, in a report to MPs. He said that UK growth would be “flat or close to zero” over the next six months.

The OECD continues to be in favour of a hard line being taken on cutting the UK budget deficit but did recommend that the Bank of England increase its quantitative easing to a total of £400bn. However, it did suggest that if the UK economy worsens then the current austerity programme should be revised. It said: “Short-term fiscal support would be warranted, for example by easing up on the planned cuts in public investment, temporarily slowing consolidation.”

Although there have been many leaks in recent days concerning George Osborne’s Autumn Statement which is being made today, it will be interesting to see to what degree he is prepared to compromise on the government’s economic policy.

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