EEF blog

Next Wednesday morning, EEF are hosting a breakfast seminar on financing the future growth in manufactuirng.

There was a not so helpful comment piece from a city financier - Nigel Rudd - in the FT today on the very subject.

His concern was about finding capital to invest in small businesses, and so is hopeful that a government sponsored programme to attract bank and pension fund capital could help solve the problem.

But while his piece taps into a rich vein about small business finance, he fails to set out why a new pool of capital from bank and pension funds would be any more successful than the current hodge-podge of government-sponsored venture and enterprise capital funds. Neither does he state what the investment criteria and the prospectus for this new pool of capital would be. 

Throwing big pots of new capital at the seemingly intractable problem of small business finance won’t help unless we take a more strategic, longer-term view of our investment problems.

Yes, we need a better economy. But given the depth of the recession, it won’t build itself. Although tough choices on public finances could curtail growth in the coming years, we can soften the blow by investing in productivity growth: in new technologies that solve our very serious long-term problems, in growing businesses than can generate wealth and jobs and in much-needed infrastructure improvements.

But over the past decade, the funding gap for longer-term investments has widened. Longer-term, riskier investments in innovation are more likely to be funded by US investors than UK ones.

Buy-outs and flipping mid-sized businesses took priority over funding truly transformational longer-term growth by smaller businesses.

And a succession of reviews on transport, planning, housing, digital and energy infrastructure risk gathering dust because of a lack of long-term capital investment.

Our economy needs to move beyond its recent short-termist, debt-fuelled growth. We should start by providing the funding for these longer-term investments that don’t fit the narrow risk-reward profile of current capital markets. To ensure this finance goes further, it should be backed by non-executive level advice and guidance. This should be the primary purpose of any government sponsored National Investment Corporation or Bank for Industry.

But unless we’re clear on what we’re investing in and why, any new pool of capital isn’t likely to be the silver bullet solution Mr Rudd suggests it will be.

The US economy grew at an annualised rate of 3.5% in third quarter.

So while the UK shrank by 0.4% between June and September, the US economy grew by just under 0.9% quarter on quarter.

What helped the US?

Well, their $3bn cash-for clunkers scheme ran for a month in August - that accounted for about a third of the growth.

Another big boost came from a slower run down of inventories.

The inventory cycle is likely to continue to provide a boost to the economy, but since the clunkers scheme was scrapped, auto sales and production have slumped. That'll weigh heavily on the fourth quarter prospects.

The question for most economists and retailers will be whether the Christmas season will be a festive or a miserable one for the economic outlook.

Last week, EEF hosted a public debate Can manufacturing save our economy? (the overwhelming answer was 'yes') had wonderful attendance, a fantastic panel and great debates.

But by far, my favourite part of the night was that the design community - and in particular students - came out in force to show a passionate interest in manufacturing.

Following on from that night I've been in touch with some of the students from the Royal College of Arts who are interested in ceramics manufacturers (they're few and far between, but we'll figure out how to get them together with the students).

But I also promised to plug their 'Battle of Ideas' event this weekend.

The speakers are brilliant and the multitude of debates ('Can arts save the economy' and 'You produce, I consume: global imbalances, causes and consequences' in particular) are mouthwatering.

Anybody interested in ideas should attend.

Earlier this week we provided a reality check on the recovery and raised the very real possibilty of a doubled-dip recession.  Well it turns out that we and most of the rest of the economics profession were some way off the mark in thinking that the UK economy had returned to growth in the third quarter.

Today's GDP release from National Statistics showed that the economy continued to contract by 0.4% in the three months to September against our expectation of 0.1% growth (consensus 0.2%).  There's relatively little detail in the first cut of data - but it does suggest that no sector of the economy reported growth for the fourth quarter running. 

The bigger question is what happens next?  As we pointed out this week stimulus measures will start to run out at the end of the year.  It looks like the economy could still be pretty fragile and there are no signs, as yet, that the economy will have much momentum on its own.  The prospect of conditions really turning around in the early part of next year is starting to look a bit more remote.  This makes it more likely that more QE and stimulus could well be on the way.

It'll be a while yet before the headlines call the end of the recession.  Mervyn King, earlier this week paraphrased Churchill describing the financial crisis

"Never in the field of financial endeavour has so much money been owed by so few to so many."

He might want to add another Churchill quote 

"Now this is not the end.  It's not even the beginning of the end." 

Yes, but...

Last night EEF held a public debate on the future of manufacturing. Great turnout, great speakers and great debate.

Before the debate kicked off, we asked the audience a simple question: Can manufacturing save the UK economy?

As you can see, most took the easy option of 'Depends'.

We asked the question again after the debate and the Chair - Stephanie Flanders of the BBC - cheekily asked the audience to pick an answer that wasn't depends.

And what you see is a huge shift, with 75% of the audience saying, YES, manufacturing can save the economy. But for most, that yes was tempered with a concern that we're not doing enough to put manufacturing at the heart of a better balanced economy.

But the most telling story of the night wasn't the poll questions or the debate. It was that representatives of the media (John Willman, Stephanie Flanders) and politicians from across the spectrum (John Hutton and John Redwood) agreed with the manufacturer (Juergen Maier of Siemens) and the designer (Stephen Bayley) about the importanc of manufactuirng to our society and our economy and about the need to do more for manufacturing.

That's a level of agreement that simply didn't exist before the recession and the credit crisis.

Now we just need to turn that desire to grow manufacturing into something more tangible...

John Redwood was a panellist at our Can manufacturing save our economy? debate last night and he's posted his thoughts on manufacturing and the event on his website. His conclusion:

"Manufacturing has to make more of its successes. Companies have to pay engineering talent world class salaries and use the poeple concerned to design and build the products of the future.

If the engineer is a manager not on the board, given a small plywood and glass box next to the shop floor, it is going to be difficult to get the engineering talent which will be offered better terms and conditions to work for an engineering consultancy or as a financial specialist in the City.

Some yesterday told me they had difficulty attracting good engineers. Grand prix car makers in Britain have no such problems, because they offer an exciting project and an attractive package. The City has no problem, because it pays high salaries.

Manufacturing just has to compete with these, and make sure they work the best hard once hired."

Is the economy out of the recessionary woods?

Tomorrow's GDP estimate for Q3 will give us a clue, but the Chancellor and the Bank Governor both appear to have some concerns about the strength of the recovery.

King's statements yesterday suggest more QE could be on the cards in November. Darling's speach to the City suggests understands the need to extend some of his fiscal stimulus through next year.

We think the estimate tomorrow will show modest growth - about 0.1% in the third quarter. (The consensus call is for 0.2%.)

But while the headlines will be full of 'return to growth' and 'is the recession over stories', we're looking ahead to the first quarter of next year.

The problem for Darling is that the car scrapage funding and the VAT cut will run out in December. That should make for happy holiday season as consumers get their shopping in before the government stimulus runs out (apparently people tend to buy cars as Christmas gifts! I need to meet these people!).

But this exposes the economy to the risk of some serious post-holiday blues. Sure retailers will run beat the VAT rise promotions, but it's not hard to image households saving more as unemployment peaks in the first half next year.

The rising risk of a double dip is clearly on the Chancellor's and the Governor's minds. And that's a good thing.

We shouldn't get carried away with any positive news that comes out of tomorrow's GDP numbers. All they really tell us is what's already happened, not what risks could lie ahead.

Today's inflation figures show just how hard it is to be an economist these days.

Annnual CPI inflation fell to 1.1%, down from 1.6% in August. The low inflation rate came as a surprise to many economists: the consensus forecast was 1.3%, we expected 1.2%.

Not a huge difference, you say. But most economists had come to accept that prices were sticky (they generally don't change much, either way. So it took a huge rise in commodity prices to push prices up in 2007-08, and a worse-recession-in-sixty-years downturn to raise concerns about inflation rates below 1%).

But the funny thing is, that while the 1.1% rate in September was below what most economists expected, it is above what the Bank of England expected (which is currently pumping billions in to the economy through its quantitative easing programme). So the brightest in the City and the Old Lady's finest both got it wrong, but in opposite directions.

Leaving aside any discussion on the state of economics as a profession, September's inflation figures point to one essential fact: still in flux, the economy is far from a stable and sustained recovery.

Output levels remain siginficantly depressed, hence the BoE's assessment that the output gap is large and so inflation rates should be falling.

Some parts of the economy (some service sectors, parts of manufacturing) are posting moderate rebounds from their very low levels. Coupled with strong stock markets and recovery elsewhere, many economists expect a v-shaped recovery (that in turn gives credence to the ideas that prices are sticky.

More data in the next couple weeks - labour market stats, the q3 GDP figure, business investment numbers and the October PMIs - are just as likely to point to recovery as to continued stagnation.

But this uncertainty is what keeps economists employed and interested (if not consistently wrong).

Yesterday the Conservative Party announced that it would plan an early rise in the pension age.

Reviewing the timetable for raising the state pension age seems a sensible approach, especially given the public finances and increasing longevity.

While it might be a quick win for the Exchequer, raising the state reiterment age will won't be an easy political win.

If an earlier date for increasing this from 65 to 66 is accompanied by a clear commitment about when the basic state pension will be increased in line with average earnings rather than prices, it should be possible to maintain broad support for this change.