EEF blog

Economic month in review

Despite the recession moderating, getting finance is still difficult for many businesses.

We are always keen to hear from firms about these problems and to take them up with government if appropriate. But from today, business can also access help directly.

The government has set up a new Financial Intermediary Service in each RDA region.  This can be accessed by calling 0845 600 9 006 or through the Business Link website (businesslink.gov.uk). 

The Business Link advisers will work with banks and businesses to resolve problems and will also provide free support and guidance.

The US economy contracted at an annualised rate of 1.0% in the second quarter, figures from the BEA have shown. 

The BEA also revised down the first-quarter GDP figure to -6.4% - the largest decline since 1982. It was previously estimated as -5.5%. 

Consumer spending, which accounts for two-thirds of US GDP, fell by 1.2%, after rising by 0.6% in 2009q1. Also weighing on overall GDP was the record fall in inventories, as firms shed $141bn of stock, compared with $114bn in the first quarter.

Partially offsetting these negative effects was higher government spending which increased almost threefold in the second quarter. Lower import volumes and smaller declines in business and residential investment also moderated the slowdown. 

Although it is widely expected the US will return to growth by the end of the year, any recovery is likely to be weak. The relatively weak dollar will continue to help the competitiveness of US exports but, without a pick up in global demand, the impact on growth from trade will be muted.

It is unlikely that consumer spending will contribute significantly to growth either. Consumer confidence is already at historic lows and has fallen in the past three months. 

Rising unemployment, which is not expected to peak until next year, will drag consumer spending down further.

I know the FT has a small circulation, so here's a joint letter from EEF, CBI, IoD, FSB and BCC on the value to employers of agency workers:

Sir, Today (July 31) the government's consultation on implementation of the agency workers directive closes. When deciding on the detail of the new regulations, it is vital that ministers choose an approach that does not jeopardise the future of temporary work in the UK.

We agree that agency workers should be properly rewarded, but it is also important that agency jobs are not lost because of ill-considered regulations. On this basis we make the following points to the government.

Under no circumstances should there be a requirement to establish equal treatment on the basis of a "hypothetical comparator". This would be extremely complicated to understand, particularly for small companies. Equal pay for agency workers must mean equality in terms of basic pay only. Many bonus schemes are complex and often relate to company performance, and most are calculated retrospectively. Any requirement to include bonuses would create huge administrative problems for employers.

And finally, implementation must not take place before autumn 2011, the latest date required by the directive. Whatever the government's approach to implementation, the directive is likely to reduce the appeal of hiring agency workers. With high levels of unemployment for the foreseeable future, it would be a terrible mistake to impose new regulations any earlier than necessary.

By following these points the government can avoid unnecessarily damaging the temporary work sector.

Neil Carberry,

Head of Employment Policy, CBI

Alistair Tebbit,

Head of Employment Policy, Institute of Directors

Adam Marshall,

Director of Policy, British Chambers of Commerce

Ben Burgher,

Chair of Employment Policy, Federation of Small Businesses

David Yeandle,

Head of Employment Policy, EEF

For completeness, here's Lord Mandelson's response to the criticism levelled by yesterday's FT leader:

From Lord Mandelson of Foy and Hartlepool.

Sir, I welcome the FT’s argument for the government’s role in building the competitive advantages of UK-based manufacturing (“Building Britain’s industrial base”, editorial July 29). I agree that the principles for such action need to be well defined. The framework for the decisions we are now making was set out in the “New Industry New Jobs” paper in April.

The best “industrial policy” Britain has ever developed is its enterprise environment and the openness of its product and labour markets. Beyond this, I see our key role as creating the right strategic signals and creating the right policy framework to give the private sector the confidence to invest.

We are focusing on cross-cutting technologies and Britain’s capability to test and develop innovative new products. At the heart of this is our huge investment in the UK’s science base. It is why our advanced manufacturing package this week invested in platform technologies with a huge range of applications across UK supply chains such as composites, silicon design and plastic electronics.

We have focused on doing only what the market alone won’t – usually because the benefits can’t be captured by a single company. No company can sensibly bear the cost of an industrial biotech demonstrator facility, but Britain will struggle to develop strengths in renewable chemicals without one. So in June we funded one, and will help small companies use it.

As far as capital for industrial innovation is concerned, we see the role of government as making sure smart investments get made, not turning itself into an investment manager. So finance initiatives such as the Innovation Investment Fund use public investment to leverage private funds, and venture capital specialists do the work of identifying and funding opportunities.

As the FT argues, the game is not picking winners. It is making sure winning companies get the support they need. Investing in national capabilities, not national champions.

Peter Mandelson,
Business Secretary

I can't seem to find EEF's comment piece for the Guardian anywhere online even though its on pg 25 of today's paper.

So here it is:

After the current economic crisis subsides, higher borrowing costs and greater financial market regulation will confine a decade of debt and public sector largesse to the history books.  When the upturn eventually arrives it is extremely difficult to see how the UK can return to pre-recession, business as usual growth. The recession provides the perfect opportunity to begin to build a better, more diverse economy.

And for a diverse economy to thrive it’s vital that manufacturers continue to evolve, adapt and grow. UK manufacturers have improved their competitiveness, productivity and global reach. They responded to the recession at the beginning of this decade, an uncompetitive exchange rate and the emergence of new low cost producers with a significant shift in their business strategies.

They stopped competing on price or volume, focusing instead on a broad range of value adding strategies. They entered niche markets and differentiated themselves through a combination of innovation and design, production capacity, flexibility and customer service. They implemented IT solutions and lean manufacturing techniques to drive up performance and efficiency. They invested in knowledge – whether wrapped in the metal of modern machinery or embodied in employee expertise – to continually add value. 

Only a stronger, globally focused and diverse economy will enable us to generate the wealth needed to correct our economic imbalances and achieve broader national prosperity.  Our economic future is, therefore, inextricably linked to the development of a strong UK manufacturing base that’s open to global markets, focused on knowledge and high value and capable of exploiting fast growing markets.

Yet, without a change to the composition of our economy, the UK is likely to grow significantly below our long-term potential. The focus, therefore, must shift to supporting a more diverse, agile and innovative manufacturing base, a sector that’s able to provide many of the solutions to the UK’s future challenges and, consequently, the goods and services exports needed to close the trade deficit and underpin future prosperity.  Put simply, the UK needs to focus its scarce resources and provide clear, long-term support for manufacturing inorder to stimulate and encourage the production of goods and services that allow us to pay or way in the world.
 

EEF went out on a limb yesterday, welcoming the government's focus on manufacturing and additional funding for key priorities, but we also criticised the government's approach to handing out the money.

We've long argued that government needs to actively suppurt manufacturing, and in Manufacturing. Our Future. we set out a clear framework that would underpin a long-term strategy to support the sector. We believe that without a framework, or without clear criteria for investment decisions, manufacturers will not have get the long-term clairty the need to make long-term investment decisions. 

So we took some flack about our criticism of yesterday's announcement. 

Here's what the FT editorial had to say, however:

"In principle, Lord Mandelson’s keenness to support British manufacturing is a good thing. It breaks with three decades of reflexive scepticism about the importance of manufacturing...[and]...in a global context of activist governments, Britain cannot afford to stand alone.

But as Lord Mandelson pursues a new policy of “industrial activism” – not to be confused with old-fashioned government intervention – he needs to articulate the principles and criteria guiding this and future decisions.

The use of public money to support private enterprise warrants close examination. The collateral benefits to British society need to be demonstrated. The government must show this is about supporting winners, not picking them.

More importantly, while activism is nice, it is no substitute for establishing a business environment where enterprise can flourish."

The Times columnist Ian King had similar words of caution:

"It seems churlish to complain at the Government’s £150 million handout to advanced manufacturing, unveiled with typical understatement by Lord Mandelson yesterday. After all, any support for manufacturing is welcome, especially for sectors such as aerospace, in which Britain excels...

If it was serious about manufacturing, it would have thought more about which parts of manufacturing deserve strategic support over the longer term. Instead, it has lobbed short-term bungs around in an unfocused manner, dithering publicly over whether to support businesses such as Jaguar Land Rover and Vauxhall when it should have acted decisively either to rescue them or to let them go under quickly."

And in case you missed it, the Guardian had a comment piece from our Director of Policy and Chief Economist, Stephen Radley. [NB: having difficulty getting the link...will update later]

The  government has finally realised that manufacturing has a critical role to play in building a better economy. But much of the government's recent support for the sector seems to mistake activity for activism.

You can see that in today’s announcements on Advanced Manufacturing. The £150m in support is nothing to blink at, but the lack the long-term strategic direction is disappointing.

What's more worrying is that continues a streak of short-termist, headline grabbing initiatives that, in total, does not provide industry the long-term certainty it needs about policy and funding priorities.

This package of measures exposes fundamental flaws in government approach to achieving this. Rather than concentrating scarce resources in areas that can make a real difference, today’s announcement continues the trait of smaller short term measures with no strategic targeting.

This scattergun approach is in danger of missing the mark and fails to put the government’s activist ambitions into practice.

Most manufacturers will struggle to see the bigger picture out of today’s announcement about the kind of industrial sector we want in the future.

This week:

For more info check out our weekly Economic Update

Nothing like bad GDP data to ruin the party.

Markets had been on a bit of a bull run lately, leading many bankers and city economists to expect the economy to have contracted by only 0.3% in the second quarter.

At first glance, today's data appear to have put paid to their optimism.

But looking below the headline, there are two clear stories:

1. Manufacturing did 'less-bad' than other sectors. It only declined by 0.3%...so while restocking helped the sector, there still is no sustained recovery in demand. In other words: we're moving sideways.

2. Services might have done better than the numbers suggest. These are only preliminary data, and so only include services data up until April. But the services PMI data for May and June were above the critical 50 mark. On average, the services PMI through the second quarter was 50.7...essentially no growth compared with today's -0.6% initial estimate. That means the services number could be revised up in the coming months...making the eventual GDP number for the second quarter not as negative as today's initial estimate.

What does it all mean?

Markets shouldn't get carried away by the slightest movements of incomplete, backwards looking data.

Today's numbers also say just as much about the state of the economy as they do about city economists' ability to accurately assess the economy.