March 10th, 2010 by Nigel Tree
Total manufacturing output rose by 0.2 per cent in January 2010 compared to the same month a year ago showing the first annual increase since March 2008, according to figures just published by the ONS. Output increased in four of the 13 sub-sectors and fell in nine sub-sectors. The largest contributors to the rise were the transport equipment industries, which rose by 17.0 per cent, the food, drink and tobacco industries, which increased by 2.0 per cent, and the other manufacturing industries, which rose by 6.5 per cent. The largest decrease in output over the same period was 4.2 per cent in the paper, printing and publishing industries.
However, between December and January, manufacturing output decreased by 0.9 per cent.
The recent changes can be seen in the graphic below.
 Index of manufacturing Source: ONS However, when we look at overall production, the economy did not fare so well. Year on year, overall production output in January 2010 was 1.5 per cent lower than in January 2009. This was largely due to an annual fall in output in the mining and quarrying sector of 8.8 per cent. Also, over the same period, output of the energy supply industries fell by 5.2 per cent with decreases in electricity supply and water supply output.
Tags: Manufacturing, production
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March 9th, 2010 by Nigel Tree
The UK’s deficit on trade in goods and services was £3.8 billion in January, compared with a deficit of £2.6 billion in December, according to figures released today by the ONS.
The surplus on trade in services was slightly down at £4.2 billion in January, compared with a surplus of £4.4 billion in December.
The deficit on trade in goods was £8.0 billion in January, compared with a deficit of £7.0 billion in December, and was the widest deficit since August 2008.
 Disappointing trade figures for January. Although the deficit with EU countries fell to £3.2 billion in January, compared with a deficit of £3.6 billion in December, the deficit with non-EU countries widened to £4.8 billion in January, compared with a deficit of only £3.4 billion in December. Trade with non-EU countries reflected a fall in exports of 12.5% on the month and a rise in imports of 1.6%.
Overall, excluding oil and erratic items, the volume of exports fell by 6.0 per cent and the volume of imports fell by 1.2 per cent, compared with December.
These numbers are particularly disappointing, as we would have expected a boost from the decline in the value of sterling. In fact over the month export prices fell by 0.6 per cent but import prices rose by 0.6 per cent as might have been expected, but this has not been reflected in an improvement in our trade balance.
Exports may have been hampered by the bad January weather, or this may be a one-month ‘blip’. We shall have to wait and see what happens next month, but the increasingly negative figures are not going to help the recovery of GDP growth this quarter, following on from the 0.3 growth in the final quarter of 2009.
Tags: Balance of Trade, economic growth, sterling
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March 8th, 2010 by Nigel Tree
Up to 270,000 civil servants are starting a two-day strike today over concerns about cuts in redundancy pay. This will include workers in courts, job centres, passport offices, tax centres and emergency police call centres. The strike has been called by The Public and Commercial Services Union (PCS).
This is the biggest strike by civil servants for over twenty years and has come about in response to the government signaling the fact that it will have to make cuts in civil service jobs. Starting in April the government is planning to save around £500m by capping the amount that is given to members of staff who are either laid-off or are taking voluntary redundancy at a level of £60,000.
Redundancy compensation is usually based on the number of years worked in that employment and the PCS argues that an employee with 20 years service and earning £24,000 per year could lose £20,000 as a result of these changes. However, according to Tessa Jowell, who is the Cabinet Office minister, “Those earning £30,000 or less – 80% of the staff – will still get up to between two and three years’ salary, while civil servants earning over £30,000 will have redundancy pay capped at two times salary.
The government also points out that five of the six civil service unions whose members have been affected, have already agreed to the changes after 18 months of negotiation.
But, Mark Serwotka, PCS general secretary, said: “Loyal civil and public servants won’t stand by and allow the government to cut jobs on the cheap. Those on strike today deliver services that touch our everyday lives from the cradle to the grave. Under these imposed changes, they face losing up to a third of their entitlements and tens of thousands of pounds if they are forced out of their job. The government is tearing up the contracts of low paid civil and public servants whilst it claims it can do nothing about bankers’ bonuses because of contractual obligations. The government need to recognise that slashing entitlements and cutting jobs on the cheap will damage public services and reach an agreement that protects existing members’ entitlements.”
With the axe about to swing in the public sector, resulting in many job losses, we can probably expect a Spring and Summer of discontent with more days being lost to strike action.
Tags: industrial action, job losses, public sector, Strikes
Posted in Strikes, government spending, labour markets, unemployment | No Comments »
March 5th, 2010 by Nigel Tree
House prices fell by 1.5% in February, the first fall since June 2009, according to the Halifax. This gave an average house price of £166,857, which was 8% higher than the trough that was reached in April 2009.
Commenting on the figures, Martin Ellis, Halifax housing economist said: “An increase in the number of properties available for sale has helped to reduce slightly the imbalance between supply and demand. At the same time, the bad weather in the first two months of 2010, together with the return of the lowest stamp duty threshold to £125,000, are likely to have had an adverse impact on housing demand. The combination of these factors appears to have helped to curb the upward pressure on house prices.”
 House prices are falling again reflecting a very delicate market. The reason for the rise in house prices over the previous seven months was largely due to a lack of supply of properties relative to demand. As this pushed up the price of houses more people decided that it was now the right time to put their house on the market. In fact, the stock of properties available for sale rose in both January and February.
On top of this, if the bad weather in the early part of this year stopped people going to the shops, it was always going to stop them looking at new houses and thus put a temporary brake on demand. Added to this, the government had raised the threshold at which stamp duty had to be paid to £175,000 last year, but this was reduced back down to £125,000 in January. As this is a tax on house purchases, it will obviously have some level of deterrent effect on people looking to buy.
Plus, Bank of England figures show that the number of approved mortgages for house purchase financing fell by a seasonally adjusted 17% between December and January, following a 1.8% decline in the previous month.
We can expect further job cuts in the months ahead and uncertainty over the effect of government austerity programmes, so it looks as though the housing market will bounce along the bottom for a while or show no more than a modest increase.
Tags: demand, house prices, mortgages, supply, tax
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March 4th, 2010 by Nigel Tree
A very highly rated measure of service activity is The Chartered Institute of Purchasing and Supply/Markit Index. This purchasing managers index rose to 58.4 in February from 54.5 in the previous month and any figure over 50 reflects growth in the sector. This was the highest level the index has reached since January 2007 and was above the level which commentators were forecasting.
This is particularly good news as services account for around 70% of activity in the UK economy. David Noble, the chief executive of the CIPS, said that: “After the snow-related blip at the start of the year, the services sector is pretty much firing on all cylinders now.”
Unfortunately, this is not pushing through into employment, as the survey notes that jobs in the sector fell for the 22nd month running. But, according to Mr Noble: “…the rate of decline was only modest…Job losses were largely the result of natural wastage and the non-replacement of leavers.”
Those parts of the service sector which recorded the biggest gains in February were the transport, storage and communications industries.
These figures reassured the markets and put a halt to the decline in the value of the pound which has been seen over the past few days, with sterling closing last night at above the $1.50 level.
Tags: Service Sector, unemployment
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March 3rd, 2010 by Nigel Tree
Yesterday, the Reserve Bank of Australia raised interest rates from 3.75% to 4.0%, which is the fourth increase in rates since last October. Yes, I did say ‘raised’ interest rates. While the rest of the world has been digging itself out of recession the Australian economy grew at 2.7% during 2009. This is at a time when other major economies were contracting at anything up to 5%.
In fact, Australia only saw a reduction in GDP in the last quarter of 2008 and as it requires two consecutive quarters of negative growth to give rise to a recession, this means that Australia never fell into recession and has been doing quite nicely, thank you very much.
How has it managed to do so well? Firstly, like many other countries, the Australian government put in place a multi-billion set of fiscal stimulus packages and increased their infrastructure spending. They also put more money into the hands of consumers in order to boost spending. However, they have also benefited from their proximity to China as they provide many of the resources and raw materials which China requires.
Glenn Stevens, Governor of the Reserve Bank of Australia summed up the reasons for another hike in interest rates as follows:
“In Australia, economic conditions in 2009 were stronger than expected, after a mild downturn a year ago. The rate of unemployment appears to have peaked at a much lower level than earlier expected. Labour market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months. There are some signs that the process of business sector de-leveraging is moderating, with the pace of decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers. Investment in the resources sector is very strong. Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year.”
Tags: Australia, economic growth, Interest rates, recession
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March 2nd, 2010 by Nigel Tree
Why did sterling fall to a 10-month low against the dollar yesterday? The answer is that it was mainly driven by political concerns. With the latest opinion polls showing that Labour is closing in on the Conservatives, the prospect is that we will have a ‘hung parliament’ this summer, which means that no single party will have an overall majority.
The concern in the markets is that in such an event parties will be jockeying to do deals with other groups, in order to form a government. Whilst this might suggest that we could end up with some sort of consensus government, the fear remains that our ‘government’ would stumble around trying to put together a cohesive policy to deal with the UK’s debt deficit.
It seems the markets are looking for a strong policy response to deal with our financial problems irrespective of which party is applying the axe to the spending budget. In fact, yesterday the pound fell four cents against the dollar, falling just below the $1.50 barrier for the first time since last May. Sterling has dropped 7% against the dollar this year alone. Sterling also fell to its lowest point in four months against the euro to reach 91.5p. Some commentators feel that the pound will fall below parity with the euro in the coming months.
The foreign exchange markets are currently very volatile due to concerns about whether the UK can raise sufficient borrowings to fund its debt, and more particularly, whether the leading credit agencies will reduce our ratings below the current AAA, which will lead to a rise in the cost of borrowing. More than that, the evidence shows that powerful hedge funds are betting against both the pound and the euro. George Soros, the billionaire investor who runs Soros Fund Management, is quoted as saying “the euro may not survive” and is currently buying into gold.
On a positive side, the fall in sterling will give additional impetus to our export sector as our goods and services will become relatively cheaper internationally. On the other hand, the price of imported goods will rise, putting even more pressure on UK inflation.
Tags: euro, Exchange Rates, government borrowing, Inflation, sterling
Posted in Exchange Rates, Inflation, International Trade, Public Finances, government borrowing, government spending, sterling | No Comments »
March 1st, 2010 by Nigel Tree
So writes Larry Elliott in his online article today at www.guardian.co.uk. He says:
“Get ready for the austerity decade. Forget all thoughts that the economic storm of the past 30 months is about to blow over. We’ve had what Mervyn King once called the NICE period of non-inflationary constant expansion but now we face a long DRAG – deficit reduction, anaemic growth. The lessons of economic history, the current configuration of the economy, and inescapable long-term challenges that have to be faced provide the same message: it’s payback time.”
To read his article click here.
Tags: deficit reduction, growth, NICE
Posted in economic growth, government borrowing, government spending, recession | No Comments »
February 26th, 2010 by Nigel Tree
Business investment in the last quarter of 2009 was 24.1% down on the same period of 2008. Not only has investment fallen by a quarter, but it is continuing to fall. The figures for the fourth quarter of last year were actually 5.8% down on the previous quarter.
The fall in business investment was evident across most industries, although there was a larger fall in manufacturing than non-manufacturing. Private sector manufacturing had the largest quarter-on-quarter fall, down by 8.4 per cent, whilst private sector non-manufacturing is down by 5.7 per cent and public corporations non-manufacturing is down by 2.3 per cent.
The recent trend can be seen in the graphic below.
 Source: ONS Compared with the fourth quarter of 2008, total business investment fell by 24.1 per cent. This fall was mainly from manufacturing investment being down 35.3 per cent. The reduced investment in private sector manufacturing, down 35.3 per cent, is mainly from industries classified within metals and metal goods, down by 50.0 per cent, solid and nuclear fuels, oil refining, down by 43.8 per cent, chemicals and man made fibres, down by 38.9 per cent, and engineering and vehicles, down by 38.8 per cent.
The planned closure of the Corus steelworks on Teesside is symptomatic of this downturn and yet given that we are supposed to be moving out of recession, we would expect investment to start turning back up again. As a component of aggregate demand, with total investment accounting for about 8% of the UK economy, these figures are yet another contributor to the pessimistic view that we may well move back into recession this year. Watch out for the revised GDP figures for the last quarter being issued today.
Tags: aggregate demand, business investment, economic growth, GDP, recession
Posted in GDP, Investment, Manufacturing, economic growth, recession | No Comments »
February 25th, 2010 by Nigel Tree
Paul Tucker, who is a member of the Monetary Policy Committee and Deputy Governor for Financial Stability, has just given a speech in which he discusses some of the current challenges facing monetary policy and issues relevant to the overall framework for preserving macroeconomic stability.
First, he discusses the effects of household and bank balance sheet repair on aggregate demand, which pose a downside risk to the outlook for activity.
Second, he considers how supply capacity has been affected by the recession.
Third, he notes the volatility of inflation and its impact on medium-term inflation expectations, which the MPC has to be sensitive about.
And, fourth, he discusses how the monetary effects of the MPC’s asset purchases may come through gradually, and how they may have assisted the process of de-leveraging by banks.
 What lessons can be learned from the recent crisis? He also looks at what lessons can be learned for maintaining macroeconomic stability, and discusses how the evolution of the financial system can alter the transmission mechanism of monetary policy and the sorts of data that need to be analysed when assessing it.
In conclusion, Paul Tucker states that: “…it is the credibility of our commitment to price stability that has enabled the Bank to cut interest rates and to inject money so aggressively in order to support nominal demand in the wake of the credit crisis… That underlines the risks of tinkering with central bankers’ inflation targets….” But another element of stability – in the financial system – needs to be addressed. He says, “…macroprudential instruments …could be used to lean against future credit booms and for making our financial system more resilient. If we could manage that, it might be the most significant extension in the overall international macro policy framework in a generation.”
To read his talk in full click here.
Tags: Bank of England, growth, Inflation, macroeconomic stability, quanititative easing
Posted in Bank of England, Inflation, Monetary Policy Committee, economic growth | No Comments »
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