EEF blog

In amongst the Friday afternoon rushing around to get things done before the weekend I've just spotted this bit of better news for Jaguar.

(We've been lighter on the blogging this week, but we are publishing our quarterly trends survey next week and there's likely to be a lot to say....)

I haven't seen it reported anywhere, but the recession in the UK is almost one year old.

Looking at the details of the GDP numbers released yesterday, you'll see that the economy actually contracted in the second quarter of 2008. Previously, the data showed the economy basically had stalled in the second quarter...now they suggest a small decline, but technically, that dates beginning of the recession to last spring.

MPC member David Blanchflower guessed as much in a speech in January of this year, but we only got official confirmation yesterday.

Of course, for business, it doesn't matter when the recession started, but when will it end. Ultimately, that depends on sorting out the banking crisis and restoring confidence to business and households. 

But don't ask me when that's likely to happen. I'm just an economist.

Yesterday's new economic data confirm the same old story: the economy shrunk by 1.5% in the last three months of 2008.

But as David Smith points out, there may actually be a sliver of a silver lining in the storm clouds:

"Within the figures, consumer spending fell by 0.7% in the fourth quarter and net trade made a small contribution to growth, with exports falling at a marginally slower rate than imports. The eyecatching figure, however, was the big drop in inventories, £2.6 billion at 2003 prices, without which the Q4 GDP decline would have been very much smaller. That bodes well for the prospect of smaller GDP declines in the coming quarters."

In your typical recession, businesses tended to over invest in capacity, so when demand fallsoff in the recession, they are left with warehouses of unused stocks. Production halts as these stocks are run down, and only picks up once the inventory overhang is sufficiently depleted. 

That's why David Smith and other journalists are so interested in the drop in inventories. With most companies seeing demand fall of a cliff at the end of last year, they were inevitably stuck with extra stock. The supposedly sharp drop in inventory suggests that the worst maybe over as companies may start producing again. 

I've done a bit of digging into whether an inventory overhang would lead to a nasty economic hangover. And my conclusion is that this may not be your typical recession.

With the advances in technology over the past decade, most businesses are much better at managing their supply chains. In manufacturing, for example, just-in-time and lean manufacturing have made operations more efficient and business less reliant on inventories. And this is true across the economy, where the relative importance of stocks is declining.

One way to measure this effect is the stock-to-turnover ratio. If companies really are more efficient, we should see them (and their turnover) growing, without a similar increase in stocks. But if the traditional story line hold true...that inventories become bloated in the run up to the recession...we should see inventories increase relative to turnover just before the recession. 

The Office of National Statistics Annual Business Inquiry shows that from 1995-2007, the stock to turnover ratio fell by an average of 13.2% across the whole economy and by almost 25% in manufacturing.

One sector, however, did see a big build up in inventory relative to turnover: the real estate & business services sectors saw their stock-to-turnover ratio increase by over 130% in the run up to the recession. (Why am I not surprised.)

So even though the drop in inventories was eye-catching for its sheer absolute size, relative to GDP, it's a much smaller drop than in previous recessions. That's not because there is worse to come, but because inventories are simply less important to the business cycle than they used to be.

Business investment in the fourth quarter of 2008 was estimated to have fallen by 3.9% from the previous quarter and 7.7% on the fourth quarter of 2007. For manufacturing, the picture was more dire:  manufacturing investment fell 11% from the third quarter and 15.7% from the fourth quarter of 2007.

Manufacturers passed up the debt binge of the past decade. Instead, they pursued a range of strategies – from increased innovation and investment to new market entry – in order to improve their competitiveness. Yet all signs suggest the sector is bearing the brunt of the financial market collapse.

This quote from Howard Archer, economist at Global Insight pretty much sums up the perfect storm battering business investment:

“Businesses are increasingly and substantially scaling back their investment in the face of sharply weakening demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential length and depth of the recession.

On top of this, the marked downturns in the commercial property sector and the housing market are substantially depressing construction investment.“

The upshot of today's data is that it reflects the terrible economic condititions that troubled manufacterers at the end of 2008. The bad news is that Howard Archer's perfect storm doesn't look like subsiding.

The FT’s Manufacturing Barometer takes the pulse of 55 UK companies across a range of industries. Its latest reading confirms that storm clouds are now well and truly overhead. The survey shows that orders are down, sales are down and expectations about the next six months – also down. On going concerns about demand prospects and reports that lending conditions show few signs of improvement suggest that this area of low pressure is set to be with us for some time.

The survey also reiterates many of the concerns that EEF members have been making – particularly around the need for speed in getting government support schemes out to the market and growing fears about the health of companies in supply chains.

Uncertainty, a lack of demand and cashflow constraints are a toxic mix as far as investment plans are concerned. Companies are considering unconventional measures to hold off on redundancies for as long as they can, but it looks like investment is set to take a hit this year – one reason why we will be looking to the Treasury to provide a temporary increase in investment allowances in the Budget in April.

It wasn’t all bad news. A few manufacturers in the survey have found some shelter in niche markets. But over the past six months the downturn, which hit the consumer and construction related sectors first, has become more widespread and a loss of confidence seems to be percolating through the sector.

EEF’s Engineering Outlook (a survey of around 800 companies) will provide some more detail on how engineering and manufacturing have been faring on Monday 2nd March.

With the constant drip of bad economic data showing how much businesses are suffering from the lack of credit, it's good to get sense of how effetive the range of government schemes have been in improving the access to credit.

And today we've received more detail about how one of those schemes - the Enterprise Finance Guarantee - has fared. Announced in November's Pre-Budget and launched on 14 January, the Enterprise Finance Guarantee is a £1bn loan guarantee scheme delivered provides a 75% government guarantee on individual loans of up to £1m to viable businesses with annual turnover of up to £25m. The guarantee can be used to support new loans, refinance existing loans or to convert part or all of an existing overdraft into a loan to release capacity to meet working capital requirements.

So far, more than £40 million in loans have already been offered and are being processed, with £14 million in loans processed in the past week alone. While the government touts this as £1m in loans a day, only 400 companies have benefited so far.

Although there have been some hiccoughs implementing the Enterprise Finance Guarantee, we should probably be realistic in terms of expectations...both banks and businesses will take time to understand the scheme and to get it - and other schemes - up and running so businesses can benefit.

Any business looking for help or further information should check here.

EEF produces an update on our campaign activity every week (the people we've seen, the issues we've raised etc).

We stick this on our main site, but we'll also try and remember to post the link on the blog every week, starting today.

It's not quite green shoots, but Business Secretary Peter Manelson has seen the future and it looks green. 

Speaking to the Cumbria Economic Forum, Lord Mandelson brushed off the economic doomsters, claiming that the road to recovery rests in a new (and low carbon) industrial revolution. 

More generally, though, he underlined the need to respond to the recession by preparing for the future:

"Some might argue that the current uncertainty of recession makes this the wrong time to focus so intensely on the future. I disagree. A recession is partly a reflection of how we see the future. As well as helping families and firms through the downturn, it is the duty of government to set out a map of our economic future that reassures and inspires. Turning the clock back is not an option. In fighting back against the current banking crisis, Britain needs to re-shape and re-balance our economy in the future."

The emphasis is mine, but Lord Mandelson's message is absolutely critical. The UK can't simply wait for the recession to run its course and return to a decade of debt-fueled growth. Nor should we hark back to the era of heavy-handed government intervention and inefficient inudustry.

Rather we've got to begin building a better balanced economy. And for government that means taking a more proactive approach to backing clean and green technologies and other high-value, fast growing markets where the UK has a natual competitive advantage.

With the UK auto industry struggling in the wake of the global recession, many factories in the UK are extending their winter shutdowns and laying off workers.

And on the back of news that output is down 60%, Tony Woodley and Derek Simpson of Unite (the trade union) have met with the Chancellor Alistair Darling, calling for £13bn to help the auto industry and struggling manufacturers.

Here's what other European countries have done to boost demand for new cars by giving incentives to scrap older cars: