EEF blog

Next month we will come up to what might have been an important milestone for the government.

23 March will be one year since it launched its ‘Plan for Growth’ – the ambitions and accountability framework designed to structure the government’s economic policy.

At the time we had been calling for a ‘Growth Mandate’ – effectively an economic strategy to match the clarity of its fiscal strategy – the ‘Fiscal Mandate’.

Sadly the Plan for Growth has so far proved to be a very poor cousin of the Fiscal Mandate.

For a start, I don’t think many even in the Westminster bubble could name the Plan for Growth as the government’s overarching economic strategy. It has no visibility in the same way the deficit-reducing Fiscal Mandate has.

(For example witness calls from later in 2011 here and here for some kind of ‘plan for growth’ – even though the government strategy is literally called ‘The Plan for Growth’.)

But this failure is really a symptom and not a cause of where the government’s strategy is falling down.

The Plan for Growth set out four ambitions for the UK of 2015:

• To create the most competitive tax system in the G20
• To make the UK one of the best places in Europe to start, finance, and grow a business
• To encourage investment and exports as a route to a more balanced economy
• To create a more educated workforce that is the most flexible in Europe

It’s not that these areas are wrong or unworthy. It’s that they’re a little too vague and too broad to have enough meaning either for businesses or people on the street, or, importantly, for Whitehall policy-makers looking for a way to prioritise economic policy initiatives.

It doesn’t have to be like this.

How about changing:

‘encourage investment and exports as a route to a more balanced economy’

To:

‘increase the proportion of annual ouput accounted for by net investment and exports by five percentage points’.

This is stretching and not wholly within the government’s control – but it certainly would make a difference to the overall economy levers and the government is not without levers it could pull.

Underneath the ambition we could have measurables including increasing the proportion of companies exporting more than 25% of their turnover or increasing the market capitalisation of AIM by 10%. The government could then introduce policies to support these.

The government does seem to know the kinds of areas it needs to focus on. It just needs to be sharper with both its ambitions and its accountability framework.

23 March 2012 will not be a heralded date for the government progress on its Plan for Growth, even if it does try this.

What it could be is an opportunity for the government to refocus its economic strategy into something meaningful for the UK economy.

Click on image to enlarge

FTAlphaville had a post yesterday about ‘missing GDP' in the US. A couple of key points to note were:

• the main reason for a slower-than-average recovery is weak consumer spending
• exports have outperformed so far, but this may not continue as they are vulnerable to global growth

This is not so far from the UK’s position, either. The graph below shows total GDP growth, which has lagged behind previous recessions...

...But, as the next graph shows, if we exclude household spending, a different pattern emerges, with growth at a roughly similar pace to that following previous recessions.

Given the weakness in the labour market, and households’ desire to pay down debts, this will not come as a surprise. It is also unlikely that household spending will improve much this year.

Although GfK NOP’s consumer confidence indicator moved up to a six-month high today, it remains subdued by long-term standards, and there is little indication so far that this has translated into increased spending. However, whilst subdued consumption clearly reflects a degree of economic stress, ‘rebalancing’ the economy does require less growth coming from household spending, and more growth from exports and investment.

In the UK exports have continued to grow but, as FTAlphaville point out, they are particularly vulnerable to global growth. The UK’s exposure to the Eurozone is therefore a key issue for the year ahead.

However, UK manufacturers – who account for around half of total exports – are relatively positive about their export potential in the year ahead. As our Executive Survey showed, over four fifths of manufacturers expect export sales to be the same or greater in the year ahead. Key to this, UK manufacturers are targeting non-traditional markets, seeking out the new growth opportunities that exist there.

The Bank of England’s Monetary Policy Committee voted unanimously to maintain the base rate at 0.5% and continue with the asset purchase programme up to a value of £275bn.

Some members felt that the risk of inflation falling below target meant that further asset purchases were likely to be required in the future.

Financial markets

• More positive news from US may have supported markets, but this will have been countered by continuing problems in the euro area
• Short term interest rates little changed in the UK, but fell in the euro area, reflecting the ECB’s policy rate reduction in December
• Equity markets improved on the news of the ECB’s rate reduction

International economy

• Euro area growth was weak, at 0.1%, in the third quarter of 2011, with core countries showing weakness too
• US starting to look more positive with fourth quarter growth likely to be around 0.8%
• Emerging world activity slowing, but no sign of a sharp fall
• Commodity prices rose slightly over the month

Money, credit, demand and output

• ONS estimates showed GDP grew 0.6% in the third quarter, but fourth quarter likely to have been weak, with some data implying contraction (ONS’s first estimate for the fourth quarter was out today and showed a contraction of 0.2%)
• Recent surveys suggest a modest pick up in December that could continue into the year ahead
• Latest indicators of consumer spending growth were mixed, but confidence still depressed
• Goods exports grew sharply in October, and did not fall back as much as expected in November
• The way firms responded to the sustained period of weak domestic demand would affect how quickly the economy recovered. The Bank noted some signs of a weakening in investment intentions.

Supply, costs and prices

• CPI inflation fell to 4.2% in December, and input prices fell 0.6% in December
• Path of CPI inflation since September had matched the Bank’s central expectations
• Seen some aggressive discounting on the part of retailers
• Slack in the labour market and its impact on wages remains a key factor in the future path of inflation, so far there is little evidence that 2011’s high inflation had led to rapid wage growth.

Overall, the broad outlook for inflation was seen as similar to that presented in November’s inflation report, though speed and extent of the fall in inflation was less certain.

For manufacturers, 2011 was a year of significant upward pressure on input costs.

But in the last couple of weeks, data releases on consumer prices and producer prices would suggest that inflation is now starting to come off the boil. The year to December saw the slowest annual increase in producer input prices since October 2010.

High and volatile input prices can cause significant problems for manufacturers, so it is good news that price pressures are starting to ease. However, since the global recovery began, another problem has emerged: that of availability.

Over 80% of manufacturing executives said that a shortage of raw materials was a significant risk in 2012.

Our survey of manufacturing executives found that concern about the availability of raw materials is pervasive, across all sizes of business and industry sectors. In fact raw material shortages are such an issue that two thirds of companies saw this as the top risk to their business plans in the year ahead – considerably more than any other issue.

Why is this?

While some risks may dent growth, or cause less concrete knocks to business, being able to business, being unable to secure or fulfil orders, or having to run below optimum capacity are real and tangible outcomes that can arise quickly when there is a lack of raw materials. 

Outlook for prices and availability

Slower global growth as a result of the Eurozone crisis and the Chinese government’s attempts to engineer a ‘soft landing’ may have abated pressure on input prices, but availability and price of specialist materials such as metals and rare earths remain an issue.

The weaker economic outlook may alleviate commodity prices, but with global demand for inputs continuing to rise, the issue of raw materials prices and shortages is set to be a perennial one.

I blogged earlier on this week about how manufacturers were somewhat gloomy about growth for the UK economy and even about their own industry’s prospects in the year ahead.

However, manufacturers are more likely to be taking a ‘glass-half-full view’ of their own company’s prospects.

Companies remain confident about their performance in export markets, with over four fifths expecting sales to be the same or greater in 2012 compared with last year and response balances are positive across all manufacturing sectors.

Responses on likely sales in the UK market are also broadly positive, especially among SMEs.

The outlook for recruitment, while positive overall for both temporary and permanent employees, is skewed towards large and small firms respectively. The main sectors likely to see growth in permanent employment are mechanical and transport sectors.

This tallies with recent reports of significant investment commitments from companies in these industries and the likely associated benefits through the supply chain. Whilst the intent to recruit is there, we will have to see whether firms are able to attract and retain the skills they need.

If there is a weak point to executives’ expectations on firm-level performance it is around profitability. Across all companies, 35% of manufacturers expect an improvement in profit margins compared with 31% predicting a further squeeze in 2012.

Today’s labour market statistics do not make particularly comforting reading. One key measure, the ILO unemployment rate, edged up to 8.4%. Unfortunately, we expect that figure to continue to rise: averaging out at around 8.6% over the course of 2012.

The economic uncertainty resulting from the Eurozone crisis that overshadowed much of the second half of 2011 is likely to affect hiring decisions in the year ahead. And while positive balances of manufacturers intend to take on both temporary and permanent workers in 2012, this is highly dependent on the sector.

Some sectors, particularly Transport (which is more exposed than most to emerging markets), are more positive about taking on new employees in the months ahead, whereas a balance of Rubber and Plastics manufacturers expects to reduce headcounts of both temporary and permanent workers.

In addition, while companies often report positive recruitment intentions, these can sometimes be frustrated by skills shortages, which are a long-term issue for the sector.

The labour market statistics also showed that the number of working days lost to labour disputes was its highest level since July 1989. Although this number was skewed by the large public sector strikes on 30th November 2011, deterioration in workplace relations has been raised as a concern by some manufacturers.

Similarly, after a couple of years of pay restraint, companies are concerned that they will face significant pressure on pay, which – at a time when materials and other input costs remain elevated – could put additional pressure on margins and profitability.

So far manufacturers and their employees have worked together to ensure good workplace relations. During the downturn this resulted in fewer job losses than have previously been seen in recessions. Reflecting this, many manufacturers see maintaining good lines of communication with employees as a crucial activity in the year ahead.