Archive for September, 2009
Tuesday, September 29th, 2009
Revisions by the Office of National Statistics show that Gross Domestic Product fell by 0.6% in the three months from April to June this year. The first estimate had been a decline of 0.8% which was subsequently downgraded to 0.7% and now 0.6%. This means that GDP is now 5.5% lower than the second quarter of 2008.
What caused the revision? This was mainly due to the fact that the ONS had seriously overestimated the decline in construction output during the quarter. Originally it was thought that construction output had fallen by 2.2% but this has now been revised downwards to 0.8%. Overall, output of the production industries fell by 0.5% compared with a drop of 5.1% in the first quarter, and manufacturing output fell by 0.1% compared with a fall of 5.4% in the previous quarter.
The latest GDP trend can be seen in the figure below.
 Source: ONS
Other figures show that service sector output fell by 0.6% compared to a fall of 1.9% in the first quarter. Household expenditure fell by 0.6% and is now 3.6% lower than the same quarter last year. Government final consumption expenditure, by contrast, rose by 0.6% to reach a level 2.2% higher than in the same quarter of 2008.
However, what was particularly telling was the drop in gross fixed capital formation of 5.2% in the second quarter, which is now showing a 17.2% drop on the second quarter of last year.
The chancellor, Alistair Darling, believes that we are nearing the end of the recession. Speaking yesterday to the Labour Party conference he said: “I think it is too early to say so with total confidence. But I stick with my Budget prediction that, as long as we continue to support the economy, recovery will be underway in the UK by the turn of the year.”
Tags: construction, gdp growth, Manufacturing, Service Sector
Posted in GDP | 1 Comment »
Monday, September 28th, 2009
There was a fall in car production of 31.5% in August compared to the same month last year, according to The Society of Motor Manufacturers and Traders (SMMT). In fact, output is down 44.6% for the year to date. At the same time, commercial vehicle output fell by 48.5% in August compared to the previous year, but this was the smallest year-on-year decline so far this year.
However, there was a lining to the cloud, and if not exactly silver it did have a bit of sparkle to it. This was the fact that cars built specifically for the UK market were up 33.8% in August to reach the highest figure for 56 months. This was mainly due to the government’s car scrappage scheme which offers £2000 to purchases buying a new car, if their old vehicle is over ten years old. The government put £300m into this scheme which was intended to run until the end of February next year, but such has been the uptake that the SMMT fear that the money on offer will be exhausted by the end of October. It is obvious that the situation in the industry would have been far graver, if the government hadn’t brought in this initiative.
 Government support for new car production has worked well
“The scrappage incentive scheme has had a positive impact on car production with one in three cars built in the UK last month for the home market and total volumes starting to stabilise,” said SMMT chief executive, Paul Everitt. “However, underlying demand remains weak and the recovery is still extremely fragile. A continuation of the scrappage incentive scheme through to the original close date of 28 February 2010 would help to sustain growth and bridge uncertainties associated with the ending of VAT discount.”
Mr Everitt also went on to say: “The continued fall in commercial vehicle output reflects ongoing weakness in the market. Specific action is needed to address business confidence and encourage investment in new business vehicles.”
The government will have to weigh up extending the scheme against the huge public sector financial deficit. However, it may mean money well spent if it keeps large numbers of auto workers in jobs rather than on the dole.
Tags: car production, government support
Posted in government spending | No Comments »
Friday, September 25th, 2009
On Wednesday the governor of the Bank of England, Mervyn King, came north and the exchange rate went south. It was his first visit to Newcastle for several years and occurred after transport links with the capital had been recently re-established.
In an interview with Newcastle’s Journal newspaper, Mr King said: “That rebalancing of the UK economy that I have been talking about for about 10 years, is very necessary. I think the fall in the exchange rate that we have seen will be helpful to that process but there’s no doubt that what we need to see now is a shift of resources into net exports – whether directly or in producing things that compete with imports that help to reduce the trade deficit …”
It was his comment about the fall in sterling being “helpful” which was picked up by the markets and resulted in a sharp fall in the value of the pound against both the euro and the dollar. The pound fell as a result to 1.0947 euros, which was its lowest level since early April, and also fell by nearly a cent against the dollar to $1.6172.
However, to be fair, the pound has weakened over recent months anyway largely due to the huge levels of government debt which are having to be financed. On top of this, the governor has been “talking the pound down” recently, and if this continues we can expect the pound to fall even further.
A cheaper pound is going to promote our export industries and can be seen as a mechanism to bolster UK growth, especially as household consumption is being constrained and the government is in the process of making spending cuts. A fall in the value of sterling will also push up the prices of imported goods, but it is clear that Mr King has few worries about this boosting UK inflation in the short to medium term.
Mr King acknowledged that the north-east’s reliance on manufacturing had seen it hard hit by the recession, but said that equally, the region was very well-placed to take advantage of any upturn. He said: “… I don’t think there are any underlying structural problems which mean that growth can’t resume. When we had the downturns in the 1970s, 1980s and 1990s there were structural issues that needed to be tackled. I don’t think that’s true now. I think once we can get back to a picture where the demand in the world economy grows more normally, then the economy here, as in the rest of the UK, is well positioned to take advantage.”
Tags: Exchange Rates, exports, Inflation, Manufacturing, north-east England, pound, sterling
Posted in Bank of England, Exchange Rates, Inflation, Manufacturing, sterling | No Comments »
Thursday, September 24th, 2009
The percentage fall in employment during the recession has been less than a third as large as the percentage contraction in the economy. This represents a much lower ‘job distress ratio’ than suffered in the recessions of the 1980s and 1990s. Had previous UK experience been repeated it is likely that around half a million jobs would have been lost.
These are the findings of the Chartered Institute of Personnel and Development (CIPD) in their recent report entitled: “Jobs: The Impact of Recession and Prospects for Recovery”. They also note that compared to earlier recessions adjustments in the labour market have been more evenly spread and have reflected cuts in incomes rather than mainly falling on jobs. They note that “A ‘shared pain recession’ of this kind demonstrates that, contrary to common perception, Britain’s flexible labour market is good for jobs and social well being.”
They also forecast that from the autumn of this year unemployment is likely to increase by more of a “crawl than a rush” towards a likely total above 3 million in 2010, and suggest that policies such as the Youth Job Guarantee Scheme may even keep the peak below 3 million.
 What will happen to unemployment over the coming years? The CIPD report also puts forward three possible scenarios for the recovery in employment:
- A jobs-lined recovery: this would reflect a strong increase in global demand and investment which would lead to an early rise in employment to the pre-recession rate by the end of 2012, reflecting the advantages of the UK’s flexible labour market.
- A jobs-light recovery: A modest recovery enabling a gradual increase in job creation, but with continued high unemployment. A return to pre-recession employment levels would not happen before 2015 at the earliest.
- A jobs-loss recovery: A modest recovery but overlaid by fears of a double-dip recession with cutbacks in recruitment. This would result in a peak unemployment level of at least 3.5 million with no return to pre-recession levels for at least ten years.
These possible scenarios were evaluated by John Philpott, Chief Economist at the CIPD, who said: “Unless the economy rebounds from recession far more strongly than most economists expect the likelihood is that the recovery will be broadly jobs-light, resulting in a slow grind back toward the pre-recession rate of unemployment. And while a jobs-loss recovery is not the most likely scenario it remains a distinct possibility, which means it is of vital importance that the government, the Bank of England, and their counterparts abroad, maintain expansionary fiscal and monetary policies for as long as necessary.”
Tags: Employment, flexible labour market, recession, unemployment
Posted in Employment, labour markets, recession, unemployment | No Comments »
Wednesday, September 23rd, 2009
Developing Asia, which excludes Japan, Australia and New Zealand, is set to expand growth by 3.9% in 2009 and 6.4% in 2010, according to the Asian Development Bank (ADB). These growth figures have been raised from the forecast last March of 3.4% and 6.0% respectively.
“Despite worsening conditions in the global economic environment, developing Asia is poised to lead the recovery from the worldwide slowdown,” said ADB Chief Economist Jong-Wha Lee.
According to the ADB’s newly published Asian Development Outlook (ADO) 2009, there are several reasons for Asia’s enhanced growth prospects. These include: the firm action taken by many governments and central banks in the region; the relatively healthy state of financial systems before the global crisis hit; and, the rapid turnaround in the larger, less export-dependent economies in the region.
The expected rapid growth is being led by China and India. The massive fiscal stimulus package and aggressive monetary easing put in place in the People’s Republic of China has led to growth forecasts of 8.2% in 2009 and 8.9% in 2010. Also, the ADB expects India to grow by 6.0% this year as a result of a large fiscal stimulus announced in July and a recovery in business confidence.
Other areas in the region are not faring quite so well. Hong Kong and Taipei are expected to shrink sharply due to a severe drop in demand for exports and countries like the Maldives have been hit by a drop in tourism.
However, Dr Lee warned that: “The improved regional outlook should not make developing Asian economies complacent. A protracted global slowdown or the hasty withdrawal of stimulus packages can degrade the region’s ongoing recovery.”
The ADB warned that if the area was to develop more resilient economies it would have to broaden the scope and structure of its openness. This would include reducing its vulnerability to external shocks by tackling the geographically unbalanced structure of its trade, capital flows and movement of workers.
The report concluded that: “By promoting closer economic linkages within the region and a more balanced internal economic structure with a bigger role for domestic demand, policy makers in developing Asia will be able to achieve rapid yet stable growth for the region.”
Tags: Asian Development Bank, China, India, world economy. development
Posted in Asia, China, Development, World Trade | No Comments »
Tuesday, September 22nd, 2009
The Office of Fair Trading (OFT) has just announced the imposition of £129.5 million in fines on 103 construction companies in England, which it found had colluded with competitors on building contracts.
The OFT concluded that the firms engaged in illegal anti-competitive bid-rigging activities in a total of 199 tenders between 2000 and 2006. The process was mainly carried out under what is referred to as ‘cover pricing’. This is where firms put in bids for a building contract where a number of the bids are not set at a level to win the contract. The organisation which has requested the tenders will take the lowest bid, but assumes that all the organisations tendering are making the best bids possible. The reality was, however, in many instances, that construction firms had reached agreements between themselves as to who was to ‘win’ the contract.
The OFT found that in 11 tendering rounds, the lowest bidder faced no genuine competition because all other bids were cover bids, increasing the risk that the client would have paid a higher price than necessary, without realising it. The OFT also found six instances where successful bidders actually agreed to pay sums of money known as ‘compensation payments’ to the ‘unsuccessful bidder’. They found payments of between £2,500 and £60,000 being facilitated by the raising of false invoices.
Altogether these infringements affected building projects worth over £200m and included schools, universities, hospitals and numerous private projects.
Such collusion resulted in a clear example of market failure. The price mechanism will only allocate resources efficiently if market participants enjoy perfect information. As a result of the collusion between building companies a situation of asymmetric information was created illegally, with the result that both public and private organisations were inadvertently left paying ‘over the odds’ for their building projects. The free market was therefore distorted. The OFT was set up to remedy such anti-competitive practices and has the power to fine firms up to 10% of turnover and to jail company directors for price fixing.
In summary, OFT director Simon Williams said: “Our investigation has uncovered significant infringements of competition law on nearly 200 projects across England. Bidding processes designed to ensure clients and in many cases taxpayers receive the best possible choice and price were distorted, creating a real risk of increased prices. This decision sends a strong message that anti-competitive and illegal practices, including cover pricing, must cease.”
Tags: collusion, distortion., market failure, Office of Fair Trading
Posted in Office of Fair Trading, market failure | No Comments »
Friday, September 18th, 2009
Latest figures show that public sector employment increased by 13,000 in the second quarter of 2009 to reach 6.039 million. Overall, employment in central government increased by 21,000, whilst employment in local government and public corporations fell by 5,000 and 3,000 respectively. There was also an increase of 1,000 in the number of employees in the Civil Service.
This is in stark contrast to the fall in private sector employment of 230,000 in the second quarter. When compared with the same quarter last year, public sector employment has increased by 289,000 although 235,000 of these were added due to the government’s takeover of banks such as the Royal Bank of Scotland, where employees have been reassigned from the private to the public sector. This is reflected in the “blip” in the final quarter of 2008 in the figure below.
 Source: ONS
The figure shows that public sector employment has continued to grow since the second quarter of 2008 and over the past two years the numbers employed in the public sector have grown from 19.7% to 20.9% of total workforce employment, whilst the private sector has fallen from 80.3% to 79.1%.
There are questions about the sustainability of these increases as it means more and more public sector workers are being financed by fewer private sector workers. Public sector wages have also been growing more quickly than those in the private sector. In the year to July pay growth (including bonuses) in the private sector stood at 1.2 per cent compared with 3.4 per cent for the public sector.
According to Matthew Elliott, chief executive of the TaxPayers’ Alliance: “Employing more and more people on wages that are growing twice as fast as the private sector, with pensions that are heavily subsidised, while the productivity of those workers falls every year is a hugely wasteful policy.
“The idea that the public payroll can simply expand again and again to somehow solve the problem of the recession is pie in the sky – in reality, this expansion is pushing up the national debt, threatening our credit rating and loading yet more spending commitments on to taxpayers that will hobble our chances of recovery.”
Now that Gordon Brown has “mouthed” the word ‘cuts’ at the TUC Conference we can expect a gradual reduction in employment within many government departments and local authorities as the government fights to bring down borrowing.
Tags: Earnings, Employment, government borrowing, private sector, public sector
Posted in Earnings, Employment, Public Finances, government borrowing | No Comments »
Thursday, September 17th, 2009
Lending for house purchase showed its first annual growth in July for the first time since early 2007, according to the latest Council of Mortgage Lenders’ survey.
House purchase lending accounted for 56,000 loans totalling £7.5 billion, which was up from 47,000 loans in July last year. There was an increase in the number of loans on the previous month of 24%, whilst the annual increase on July last year was 19%. However, when we look at the value of the loans this was up 27% on June but was only 6% higher when compared with July 2008.
Although the number of loans for remortgage was 21% up on the previous month, this was still down a substantial 53% on July last year and in terms of value was down 61%. This suggests that home owners are remaining cautious and are reluctant to take on additional debt against their home to fund current spending.
 There was a surge in mortgage lending in July
What is particularly promising is that the number of loans given to home owners who were moving was substantially up in July. In fact, there were 20,400 first-time buyer loans and 35,700 home-mover loans in July, up 18% and 28% respectively on June. Although compared with the previous year, the rise in first-time buyer numbers was higher, up 22% with a 17% rise in the number of movers.
For first-time buyers the proportion of income spent on interest payments fell to 15% in July, down from 19.8% in July 2008. For house movers the figures were 11.1% and 17%. This obviously reflects the tightening up by mortgage lenders who are no longer prepared to offer the unsustainably large mortgages to income which they were doing before the crash as well as the fall in interest rates.
Does this mean that the corner has now turned in the housing market? No, not necessarily. According to Paul Samter, Council for Mortgage Lenders economist: “It’s tempting to call the turn in the mortgage market at this point, and there is certainly concrete evidence that lending for house purchase is increasing. But there are still constraints affecting the lending industry’s capacity to fund increased lending as well as less consumer motivation to remortgage for the time being. The overall lending picture is likely to stay relatively subdued for some time, especially as the wider economy is far from robust yet.”
Tags: Housing, mortgages
Posted in Housing | No Comments »
Wednesday, September 16th, 2009
The number of people unemployed in the UK rose by 210,000 to 2.47 million in the April-June quarter. This was the highest quarterly unemployment figure since the three months to November 1996. There was an increase of 743,000 over the past 12 months in the numbers unemployed.. This means that the unemployment rate increased by 0.7 over the previous quarter to 7.9% and is up 2.3 percentage points over the year.
However, the rate of increase in unemployment is slowing. In the previous quarter 220,000 had lost their jobs and although the current quarter only saw 10,000 fewer lost jobs, at least it is moving in the right direction. This is added to by the fact that redundancies were 246,000 in the latest three months, but had peaked previously at 302,000 in the January to March quarter.
The recent trend in employment and unemployment can be seen in the figure below.
 Source: ONS
As far as the claimant count is concerned, which measures the number of people claiming Jobseekers Allowance, this reached 1.61 million in August 2009 – the highest figure since May 1997.
The government is investigating the large divergence between the two measures of unemployment, which may in part be caused by the fact that some people may feel that they have the ability to get a new job relatively quickly, and may therefore not sign on. Others may wish to avoid any possible stigma of appearing to need unemployment benefits.
On a regional basis the West Midlands has been hardest hit with unemployment having reached 10.5% which is up 4.2 percentage points over the past year.
In parallel to increased unemployment, the employment rate has also fallen, to 72.5% for the three months to July 2009. This figure has not been lower since February 1997. Altogether there are now 28.89 million people in employment, which is a reduction of 217,000 over the quarter and 600,000 over the past year.
We can expect unemployment to continue to grow and the governor of the Bank of England has just warned that the recovery would be a long one. One reason that unemployment continues to worsen even as the economy starts to recover, is that some companies hang onto staff because they cannot afford the cost of redundancy. Perversely, it is when things start to get somewhat better that they feel they can cut their wage bill by laying off staff. For others, they have only managed to stay afloat by getting their staff to work longer and harder during the recession, and possibly also taking a cut in wages. Again, as they start to come out the other side they may tend to reduce their staffing levels. Hardly the reward that staff were expecting but unfortunately it happens.
Tags: Employment, redundancies, regional unemployment, unemployment
Posted in Employment, unemployment | No Comments »
Tuesday, September 15th, 2009
The government’s target measure for inflation, the Consumer Prices Index (CPI) fell from 1.8% in July to 1.6% in August. This was its lowest level since February 2005. The Bank of England aims to keep this measure of inflation within one percentage point of a 2% target rate.
The largest downward pressure affecting the CPI rate came from housing and household services. However, the largest overall effect came from gas prices which were relatively stable since last month, but had risen significantly a year ago. A similar situation was also seen in electricity prices.
There was also a large downward pressure from food and non-alcoholic drinks, with prices falling at their fastest rate in a July-August period since 2000. This compares to a price rise of 1.4% a year ago.
The latest inflation figures can be seen in the graphic below.
 Annual Inflation Rates - 12 month percentage change. Source:ONS
The largest upward contribution to the CPI rate came from transport. This is because prices rose for fuel and lubricants between July and August, but fell during the same period last year at the fastest rate ever recorded for this period. The average price of petrol rose by 1.1 pence per litre between July and August this year, to reach 103.8 pence, compared with a fall of 5.5 pence over the same month last year.
The Retail Prices Index (RPI), which includes mortgage interest payments and housing costs, stayed in negative territory whilst rising slightly from -1.4% in July to -1.3% in August. The same factors affected both the CPI and the RPI but the one difference was the methods used to measure the price of new cars which resulted in a larger upward pressure in the RPI.
RPIX inflation, which is the RPI excluding mortgage interest payments, was 1.4% in August, reflecting a rise from 1.2% in July.
Although the main measure of inflation is falling in the UK we are still showing higher price rises than the rest of the EU. The latest comparable figures show a CPI in July of 1.8% in the UK as opposed to a provisional figure for the whole of the EU of only 0.2%.
But what can we expect over the coming months? Last week, Mervyn King, Governor of the Bank of England, told a Treasury Select Committee that inflation is likely to be volatile over the next six months. He forecast that inflation would fall further below the 2% target before rising above it. He said: “That volatility reflects base effects as well as the reversal of last year’s VAT cut.”
Tags: CPI, European Union, Inflation, RPI, RPIX
Posted in Bank of England, European Union, Inflation | No Comments »
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