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Insights into UK manufacturing

Business Growth Fund launch - now we need to see access to finance improve

Andrew Johnson May 19, 2011 09:39

Today in Birmingham the BBA Taskforce banks are launching the Business Growth Fund (BGF), providing equity investments for growing SMEs with turnovers of £10-£100 million, looking for £2-10 million.

For the avoidance of doubt this is the banks’ fund, which they committed to as part of their Taskforce commitments in October. The Merlin agreement in February bumped it up from £1.5 billion to £2.5 billion (viz Cable on the radio this morning not a representative of the banks) but there is no government money in here, not even the £50 million previously set aside for the idea that preceded the BGF, the Growth Capital Fund.

We’ve welcomed the intent to address the growth capital gap, identified most recently in the 2009 Rowlands Review, that is holding back some promising UK companies from growing.

Even though this is funded by the banks, it does go towards supporting an increase in sources of finance outside of traditional bank lending – especially important for fast growing companies where bank lending is not appropriate.

This is an area where we have previously called for progress. And we’re further encouraged by positive noises about the BGF’s board including people with real business (even manufacturing!) expertise, again something we’ve been looking for in the financial sector.

However, the launch of the fund again highlights the limited progress being made in increasing the provision of mezzanine debt finance that the Rowlands Review recommended as the best way to address the growth capital gap.

This is important because often growing SMEs have an aversion to giving up an equity stake in their business and the control that goes with that. The BGF will take a seat on the board in the companies it invests in with stakes ranging from 10-50%.

How much this impedes the progress of the Business Growth Fund i.e. by discouraging take up will need to be closely monitored.

With the launch of the BGF all 17 of the Taskforce banks’ commitments set out in October are underway. And of course we have the government’s ‘Project Merlin’ agreement with the banks to increase lending to UK businesses.

However, signs of an improving landscape, particularly for SMEs have been slow to emerge following the financial crisis.

So now we get to the point of all this – improving access to finance. We need to see it happen – and sooner rather than later. And we need to start hearing from the government what that improvement looks like and by when.

The Prime Minister said on Tuesday that Merlin was very much his. While I couldn’t follow his logic on gross v net lending targets, I do agree with him that, so far, results in lending trends have been disappointing. Cable said this morning there's PwC analysis out on Monday looking at performance so far, my hunch is that this too will disappoint.

However, the PM believes the performance of banks needs to judged over the full year of the agreement not off partial data. Fair enough.

But the clock is nevertheless ticking for the actions of both the banks and the government to deliver results. And the benchmark isn't some number on gross lending, which could turn out meaningless if net lending is withdrawn from the economy. The benchmark is meeting the government’s own ambition set out in the Plan for Growth to see ‘more finance for start ups and business expansion’ and inadequate access to finance no longer holding back growth.

With the actions announced so far we’re hopeful of seeing access to finance improve but progress is far from guaranteed.

We need to be thinking now about what more could be done if present measures prove insufficient. Growing companies looking for credit and the UK recovery more generally cannot afford to wait.

Is greater risk the route to greater innovation?

Felicity Burch May 18, 2011 16:24

Tim Harford tweeted earlier today with an extract from his new book. The extract deals with how research funding can be used to generate “insanely great ideas”, instead of “pretty good ones”.

His conclusion? Funding models must allow for more experimentation. He quotes evidence that “more open-ended, risky …grants [fund] the most important, unusual, and influential research.”

This has economic implications. Companies already have to innovate to compete, but often this will be skewed towards lower-risk incremental improvements rather than developing riskier projects where the return is uncertain.

But historically some of the greatest problems facing industry have required big leaps in technology. They have often also reaped the greatest rewards, both for industry and society.


A little over a month ago I attended the Prize Summit, where we discussed the benefits of using prizes to fund research. There are several reasons why increased use of prizes could really drive innovative leaps:


  • Prizes encourage an experimental approach to innovation, even prize entrants who do not win can develop new and useful ideas as a result of entering
  • The competitive element can encourage investment many times greater than the prize purse
  • Prizes can raise awareness of the problem that is to be solved, and encourage innovators from broader fields
  • Prizes bestow credibility on the innovation


But there are also reasons why prizes can fail. In McKinsey’s influential report on prizes they note the importance of good design. As Tim’s extract showed, great ideas often require quirky solutions.

It is therefore crucial that prizes are not too prescriptive. For example, rather than requiring a specific method the prize should specify a required solution. This allows for greater experimentation.

Prizes should also seek to reduce the risks to entrants. One solution to this is to break the judgement down into multiple stages.

A couple of examples of really inspiring prizes include the Ansari X prize, which has been credited with leading the way to commercial space travel; and the Saltire Prize, currently ongoing in Scotland, which aims to develop marine power technologies.


Fastest growth in manufacturing vacancies on record

Felicity Burch May 18, 2011 15:07

Data released by the ONS this morning showed that the total number of jobs vacancies in the economy fell by 30,000 in the last quarter. This is largely confined to the public sector, with 28,000 fewer vacanies reported in public administration and defence. This figure will include a drop in the number temporary of vacancies associated with the Census, but it serves to highlight the importance of private sector jobs for the health of the labour market.

The good news is that manufacturers are looking to take on new workers. The number of vacancies for workers in manufacturing grew by nearly 60% over the last year. This is the fastest growth on record. True, this does reflect a bounce-back from the low point of the recession, but even over the last three months an additional 6,000 vacancies have been advertised by the sector.

Figure 1: Vacancies in manufacturing (thousands)

However, anecdotal evidence does suggest that with recovery other problems - such as skills shortages - are emerging.


Green Investment Bank bickering misses the point

Andrew Johnson May 17, 2011 11:26

Today’s FT reports that Energy Secretary Chris Huhne and Business Secretary Vince Cable are at loggerheads over the mandate for the GIB.

Apparently Cable wants it to stick to solar, wind farms, and energy efficiency. Huhne wants the bank to go further and support newer technologies in wave and tidal power.

What both seem to miss out is the opportunity for the GIB to support low carbon/green manufacturing and decarbonisation of manufacturing processes.

With the government announcing in March the GIB won’t be able to borrow until 2015, does it really make sense to focus on energy infrastructure, which necessarily will require very large investments? Until it can borrow, the GIB will be restricted to its £1 billion in funding (+ asset sales at some point) and whatever it can lever in from the private sector in co-investment.

If you buy the Green Investment Bank Commission’s analysis of the energy infrastructure investment deficit out to 2025, the investment need is in the 10s if not 100s of £ billions.

On the other hand, the opportunities created by climate change are leading many manufacturers to look at developing innovative green products in the UK. Like many new innovative manufacturers, low carbon manufacturers often struggle to access the finance they need to help their business grow through standard financial sources.

So by having a mandate that includes supporting low carbon manufacturing, the GIB would help these firms develop – and that seems a more realistic prospect in the short term with restricted funding than making an impression on our energy infrastructure.

Decarbonisation is a further opportunity missed. Making their processes less carbon intensive would be more attractive to UK manufacturers if this was backed by the GIB.

It’s a missed opportunity that particularly sticks in the craw given Huhne’s 4th carbon budget, out today, also hits UK manufacturers over the head and sticks out our neck on climate policy even further from our European friends (who in turn are well out of line with the rest of the world).

Inflation of expectations

Felicity Burch May 17, 2011 11:22

Inflation is higher, and the MPC has once again pushed out its forecasts for when inflation should return to target. The Governor of the Bank of England has had to write a sixth consecutive letter to the Chancellor. Here's a brief look back over the Bank's inflation expectations in the last year.

May 2010
The May projections also suggest that, absent further price level surprises, it is likely that inflation will fall back to target within a year.  
August  2010
Following the announcement in the Budget of a further increase in VAT, inflation is now expected to remain above the 2% target until the end of 2011 – about a year longer than projected in May. 
November  2010
CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so. Indeed, over the next few months the inflation rate might rise further. 
February  2011
Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months, appreciably higher than when I last wrote to you. 
May  2011
Continuing volatility in energy and commodity prices makes it difficult to be sure when inflation will return to the target. As explained in the May Inflation Report, inflation is likely to rise further over the next few months… [the MPC expect] inflation to fall back through 2012 and into 2013, by which time the chances of inflation being above or below the target were broadly balanced. 


One expectation hasn't changed: there will be another letter in three months time.


Inflation is up again, but for how long?

Felicity Burch May 17, 2011 09:37

Figures released today showed that inflation was up again.



Following last week’s inflation report, in which the Bank revised its near-term forecasts for inflation up, this was perhaps to be expected. Forecasts made even before this data was released suggested that CPI inflation will average around 4.3% in 2011.  
The Bank of England currently still expects inflation to fall back in 2012 as the effects of VAT, past commodity price rises and exchange rate depreciation fade away.  
Upside risks:
As we have previously noted high inflation can lead to higher wage expectations, and therefore higher pay settlements this could drive further inflation. With this in mind, the MPC will be keeping a careful watch on pay settlements. And so will this blog. Tomorrow ONS will release its data on average weekly earnings and EEF’s own pay settlements figure will also be made available. 
Downside risks:
In the Bank’s inflation report last week, it was noted that the weak growth seen in the last six months could bear down on inflation. This has been Adam Posen’s line for several months, and he has consequently continued to vote for extended QE. Posen is giving a speech later today. He may argue that weaker-than-expected growth has vindicated his case for looser monetary policy, but will he say the same about the-higher-than-expected inflation?   



3 key mistakes the ECB made on Greece

Jeegar Kakkad May 16, 2011 16:13

Even as Dominique Strauss-Kahn is trending on twitter and @faisalislam live tweets the Euro-crisis talks, an article by Jeffrey Frankel on Vox pinpoints the three reasons where the ECB failed on Greece:

  • Mistake #1: The decision in 2000 to admit Greece in the Eurozone.
  • Mistake #2: Allowing the interest rate spreads on sovereign bonds issued by Greece (and other periphery countries) to fall almost to zero during the period 2002-2007.
  • Mistake #3: The failure to send Greece to the IMF early in the crisis.

The solution?

  • The Eurozone should adopt a rule that whenever a country violates the fiscal criterion of the Pact (say, a budget deficit in excess of 3% of GDP, structurally adjusted), the ECB must stop accepting that government’s debt as collateral.

That's a fairly harsh punishment and would be severe enough to scare any would-be profligates straight.


Were the seeds of the crisis sown in mid-2001?

Jeegar Kakkad May 16, 2011 09:08

Last Friday, FT Alphaville wrote up a Kevin Gaynor (from Nomura) comment that pinpointed mid-2001 as the starting point for the recent crisis.

As Gaynor states:

"Looking back it now seems that a fundamental shift happened in mid 2001 to the commodity and currency world, a shift which has been ongoing since and that has affected the global supply side inflation picture around dramatically.

This shift has not been analyzed before as far as I’m aware, but in fact, it appears to have dominated asset returns over the period. The US Dollar measured against its broad index shifted from being in a quasi permanent appreciation since the breakup of Bretton Woods, into a depreciating phase which is still going on today.

The CRB index, which had been in a broad cycle since the 1960s, shifted into a turbo charged increase phase. Not surprisingly, the basic materials and oil and gas components of the global equity index shifted into a major bull phase at the same time and have together been the two best performing sectors over the period."

But if he's right, the question is why did dollar and commodity markets experienced a structural shift in mid-2001?

Commenting on the FT Alphaville post, my answer was that the Bush tax cuts and the September 11 attacks resulted in a massive fiscal earthquake:

"Two fundamental global economic pivot points in mid-2001 were the US passing the first Bush tax cuts and the September 11 attacks.

It's why the US fiscal position shifted from the 2001 projection of $889 billion annual surplus in 2011 to a $1,480 billion deficit forecast this year by the CBO for 2011. A $2.3 trillion swing in the deficit for 2011.

The impact on net indebtedness? Instead of a surplus of $2.3 trillion, it has a net debt of $10.4 trillion - a $12.7 trillion swing in a decade."

The rest of the FT Alphaville post and the comments are worth reading because they flag up the rather stark implications for global rebalancing.


Can export strength compensate for domestic weakness in 2011q2?

Andrew Johnson May 13, 2011 15:22

The UK economy has stuttered along since the end of 2010.

2011q1 growth was weaker than many expected, including the OBR and the Bank of England, at 0.5%. Taking into account the 2010q4 contraction, the economy has been flat for six months.

Prospects for the second quarter look moderate, with modest growth set to continue.

Consumer spending weakness in the UK in 2011 so far, received a boost in April from the bank holidays and warm weather. This impact however is likely to be temporary. UK households are continuing to feel the squeeze on their disposable incomes from the VAT rise in January and strong food price inflation.

Investment intentions continue to be clouded by uncertainties. Demand uncertainties have been further complicated by volatile and (until very recently) increasing commodity prices - for many firms this makes sitting on cash the smart option right now.

While 2011q1 overall showed an improvement in the UK trade position relative to 2010q4, this appeared to have weakened at the end with ONS stats showing the deficit widening in March compared with February.

This was driven by a contraction in goods exports to countries outside the EU, with falls notably heavy in intermediate and capital goods exports. Some analysts fear that recent softness in commodity prices might indicate weaker activity in emerging markets.

This is particularly important for manufacturers as emerging markets are where they have seen strength in the recovery.

But on the flipside, more traditional UK markets in Europe, notably France and Germany, are powering ahead, with the Germans in particular showing strengthening domestic demand (and in impressive 1.5% q/q growth figure for 2011q1).

However, there are reasons to think the recovery in trade will revert to type in 2011q2. EU countries, with the possible exception of Germany, are unlikely to be able to sustain strong domestic demand recorded in q1.

And strength still remains in emerging markets. China beat expectations for retail sales growth in 2011q1 and with inflation also beating forecasts, pressure continues to build for an appreciation of the renminbi – a benefit to UK exporters.

For Asia more generally, BBVA (for example), sees continued strong growth in 2011, albeit moderated by high oil prices and supply disruption from Japan’s earthquake and tsunami.

In fact this supply disruption made it to the UK too, with UK outlets of Japanese-owned carmakers having some production restrictions.

This was perhaps part of the picture in April’s manufacturing PMI, which declined to a seventh month low, following January’s peak (though still very much in expansion territory).

How serious the Japanese impacts are remains to be seen, with some tentative indications that it may not be as serious as initially thought. What impacts we do see may be confined to the automotive sector in 2011q2.

The orders reading for the PMI underlined the contrast in strength between domestic and export markets. While this was already the case previously the difference, export market strength v domestic market weakness is becoming much more stark.

Export orders continue to be strong, particularly from emerging markets but also the U.S. and EU. But the domestic market appears to be weak and getting weaker.

Manufacturing powered through another strong quarter in 2011q1 and as my colleague Jeegar has noted is responsible for a larger share of the UK’s recovery than its share of the overall economy i.e. manufacturing punches above its weight.

We’ll be having a further think over the next few weeks about conditions for 2011q2 and coming to a view as to whether export strength will continue to deliver positive results for manufacturing and the wider economy.

Keep an eye out for our views early next month in the next edition of EEF’s Manufacturing Outlook.

Manufacturing a healthier economy

Felicity Burch May 13, 2011 11:09

Yesterday the FT reported that Geoff Dicks – one of the founding members of the Office for Budget Responsibility – had raised concerns about the UK’s longer-term potential growth rate. His main worry was that productivity growth would prove disappointing. These concerns have been fuelled by the contraction of the highly productive financial sector.

It’s a good thing, then, that manufacturing is proving to be the driving force behind the UK’s recovery. Here’s what has happened with manufacturing productivity in the last few years:

Figure 1: output per hour worked, index (2005=100)

Even taking the recession into account, growth in productivity in manufacturing has far outstripped the economy as a whole.

As Mervyn King said in the inflation report press conference on Wednesday:

An increase in “the share of manufacturing versus services would actually boost the growth rate of productivity”


This is an informal blog about manufacturing and the economy written by EEF's policy and representation staff. While it is written from an EEF perspective, contributions should not be taken as formal statements of EEF policy, unless stated otherwise. Nor does it cover all the issues on which we campaign - you can check these out in more detail at our main site.

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