EEF blog

Insights into UK manufacturing

Investment recovery starts to bloom

Lee Hopley May 22, 2014 10:12

The first estimate of GDP growth in 2014q1 showed another solid quarter of expansion for the UK. As usual we get a bit more detail in the second cut of numbers released this morning, and there were some encouraging trends - particularly on business investment. But first, the key points: 

GDP Headlines

  • Growth unrevised - GDP up 0.8%, manufacturing up 1.4% in the first quarter.
  • Business investment grows for 5th consecutive quarter - up 2.7%.
  • Exports down - no contribution from net trade at the start of 2014.
  • Households were the main contributor to growth, with spending up 0.8%.

Business invests

Economists have been talking about rebalancing for long time now, but with news that business investment recorded another quarter of growth in the first three months of the year, we may now be seeing clearer signs that the recovery is beginning to broaden out.

Indeed, in contrast to the trend of continuous downgrades to investment forecasts, growth in the first quarter came in a bit stronger than we'd expected. 

As after a long wait for a recovery in business investment we've got five consecutive quarters of growth - last seen in 1998; and the highest level of business investment since 2008q3. Still, we are only edging towards pre-recession levels (still around 17% below) which arguably weren't that great a starting point.

Investment growth, £bn

There's always a but .... exports

The other component for better balanced growth is positive contributions from net trade. Today's data don't shine much new light on this - we know from earlier trade statistics that the year didn't get off to a great start with exports declining by 1%. Imports also fell leaving the net contribution from trade at 0. Over the past four quarters trade has only boost growth in one.

That could change. Business surveys have been more upbeat about new order intake from overseas customers and expanding activity, as signalled by today's flash PMIs, in Europe, should bode somewhat better for the exports in the official data in the coming quarters.

Tags:

May MPC meeting – summary of minutes

Neil Prothero May 21, 2014 15:23

It may still be some time before the economy actually sees a rise in official interest rates, but there are growing signs that sentiment in the central bank is beginning to shift. More than five years after the Bank of England (BoE) cut its policy rate to a historic 315-year low of 0.5%, the minutes published today of the May meeting of the Monetary Policy Committee (MPC) continued to present a dovish tone, but also hinted that debate is likely to become more intense over the coming months.

The decision

The minutes confirmed that all nine MPC members voted to maintain Bank Rate at 0.5% and the stock of purchased assets at £375 billion at the meeting on May 8th.

The emerging story behind the decision

According to the minutes, the central view of the MPC was that the margin of spare capacity in the UK economy remained in the region of 1-1.5% of GDP, that inflationary pressures remained subdued, and that the date at which financial markets were pricing in the first rise in Bank Rate remained around the spring of 2015. The key question, however, is how long is this consensus view likely to last, given the steady stream of robust economic data (the latest of which signalled buoyant retail sales and mortgage lending in April), still weak productivity trends and concerns over rapidly rising house prices in parts of the economy.

There were some clear hints in today’s report of diverging opinions within the MPC. The minutes explicitly note "a variety of views on the appropriate path of monetary policy", while also stating that "It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy".

These specific references are the most hawkish that have appeared in the MPC minutes for some time, and contrast with the more downbeat tone adopted by the BoE governor, Mark Carney, who has been keen to stress the continuing signs of slack in the labour market and the fact that UK output is only now returning to pre-crisis levels.

That said, it is impossible to read too much into the implications of the MPC’s current musings, given that the rate-setting Committee is about to welcome three new members over the next few months. So far there are few clues about how the newcomers are likely to vote.

Overview of the May minutes

Here’s an overview of the main economic developments and issues noted in the minutes.

Global Outlook

  • Recent data had been mixed, but MPC’s expectation of sustained global expansion was broadly unchanged.
  • Unexpected weakness of US GDP in Q1, but rebound expected in Q2 after poor weather and one-off factors.
  • Indicators continued to point to declining momentum in China, amid banking-sector risks.
  • Modest strengthening of activity in the Eurozone, but still a long way to go in adjustment process. Further monetary stimulus from ECB was likely.
  • Commodity prices remained sensitive to political uncertainty in Ukraine.

Financial markets

  • Asset price volatility was relatively low, but likely to increase as advanced economies return to more normal policy settings.
  • Further rise in sterling effective exchange rate, supported by domestic demand growth.

Domestic market

  • Business surveys pointed to strong near-term growth. BoE currently forecasting 0.9% GDP growth in Q2.
  • Central view that growth would ease a little as pent-up demand faded, but remain relatively steady.
  • Credit Conditions Survey indicated improving spreads and availability of lending, but bank lending to companies weaker than expected in Q1.
  • Slight softening in mortgage lending data, but conditions for continued momentum in house prices remained in place, especially in London.
  • BoE Agents noted growing concerns over a shortage of properties for sale, which "might be due to prospective sellers holding out until prices rose further".
  • Reforms associated with the Mortgage Market Review (MMR) had recently come into force. Too soon to draw conclusions about medium-term impact.

Prices and costs

  • Unemployment rate had fallen below the 7% threshold set out in the MPC’s guidance in August 2013, triggering the next phase of forward guidance.
  • Tentative signs of a slight pick-up in nominal wage growth.
  • MPC expected wage growth to accelerate gradually as productivity improved and as slack was reduced.
  • But still considerable uncertainty around the timing and extent of any strengthening.
  • Outlook for inflation little changed, with CPI rate projected to be close to 2% target in two to three years’ time.

Tags:

CPI inflation rate ticks up in April

Felicity Burch May 20, 2014 10:12

ONS figures released this morning show the CPI inflation rate in the UK ticked up to 1.8% in the year to April, from 1.6% in the year to March.

The timing of Easter (which was in March last year and April this year) will have played a part in the rise in inflation, with transport costs such as air fares having increased between March and April 2014, compared with a fall between the same two months a year earlier.

Some other upward contributions to the rate of inflation were clothing and footwear; food and non-alcoholic beverages; and alcohol and tobacco.

Despite this month’s rise in CPI, headline inflation is likely to remain relatively subdued for a number of reasons:

Strength of sterling - this reduces the price of imports, which should push down inflationary pressures. Import prices fell 5.9% in the year to April, the seventh consecutive month to show a fall in the annual rate.

Linked to this, the price of producer inputs has been falling. Producers’ input prices fell 5.5% in the year to April. Prices for most inputs were falling over the 12-month period.

 

Wage growth remains relatively subdued. Although manufacturing pay growth was up 2.9% year on year in the three months to March, for the economy as a whole average weekly earnings only rose 1.7%.

Universities have flexibility to recruit more STEM students but need capacity to do so

Verity O'Keefe May 19, 2014 08:16

Engineering degree applications vs. acceptances

When talking about increasing the number of people studying engineering at university we often tend to focus on applications but what is important is to look at acceptances also, and explore the differences between these two figures. There is after all little benefit in significant increases in engineering degree applications if universities aren’t accepting them.

If we look at engineering degree applications against acceptances we can see a gap has emerged in recent years (See Chart). This suggests that whilst we may be increasing the number of learners applying to study the STEM disciplines at university, this does not always translate into STEM learners, or indeed STEM qualifiers.

Applications and acceptances for engineering degrees

Source: UCAS

To an extent, this gap is likely to reflect the previous student number controls applied to universities, as well as other factors such as prospective students not meeting the criteria.

Universities now have flexibility to recruit more students

At the end of 2013, the government announced that it would remove student controls. Whilst this decision received a number of positive commentaries from stakeholders, Universities UK (UUK) expressed some concerns over the cost of relaxing student number controls. Whilst UUK has said it is confident that higher education providers would be able to cover the cost of provision, significant increases in student numbers would require additional capital infrastructure and this is where cost could become an issue.

Recent STEM capital funding is welcome, but is not enough

Government has recognised the need for more places to serve demand from STEM applicants. In September 2013, the government announced £200m STEM capital funding for the 2015-16 academic year, acknowledging that the cost of delivering courses such as engineering is far greater than other disciplines.

The Engineering Professor’s Council (EPC) estimates that it costs around £12,000 per student to deliver undergraduate engineering programmes, yet HE institutions are able to charge up to £9,000 in fees. The EPC has argued that he Band P premium will continue to play a key role in ensuring the future sustainability of engineering programme; however this is still only around £1,500. The maths doesn’t quite add up.

One would think then that universities would jump at the chance to access additional funding. But let’s have a think of what it entails.

To take advantage of this funding higher education institutions must match-fund any allocation on at least a one-to-one basis resulting in the total STEM capital investment being at least £400m.

However, will this really be enough to supply the number of STEM students demanded by industry (remembering that 66% of manufacturers plan to recruit an engineering graduate in the next three years).

Moreover, the funding has only been allocated for a single year (2015-16) and therefore some universities may not expand engineering and science departments on this basis of such time-limited funding.

The investment from the government is to be focused on infrastructure to support the teaching of STEM subjects. The resources and facilities used by HE learners must replicate those of industry as closely as possible. Limitations to funding may prevent this from becoming a reality.

University-business partnerships will become more crucial

Higher education providers may then need to seek alternative capital finance, either provided from within their organisation or from external sources, which could include businesses.

Universities may find themselves relying on business partnerships, such as those that already exist such as Coventry University’s partnership with Unipart, which saw the creation of a faculty on the factory floor.

But these are fairly few and far between. As we blogged previously only 5% of small firms are able to fund faculties.

Government must take a long-term approach

Whilst increased investment from industry may support universities in their bids for part of the £200m funding allocated for 2015-16 – this is still a short-term win.

Government must take a longer term view on how to ensure universities have sufficient capital funding to deliver the high quality STEM courses demanded by industry.

Tags:

Just 30 days to go to IFB – the world-class celebration of those who ‘Make it Britain’

Guest Blog May 16, 2014 08:31

Darrell Matthews is North West Region Director at EEF, the manufacturers’ organisation

The International Festival for Business couldn’t come at a better time for manufacturers – because 2014 is rapidly turning out to be the year of the makers. Manufacturing is helping to power the economic recovery, delivering strong growth (the sector is likely to grow at least 3% this year) and with output, orders, employment and investment intentions at or approaching record highs.

And now, during the week of 23rd – 27th June, the world will be coming to Liverpool to see just what all the fuss is about.

And this is why we at EEF are committed to making this festival a success. Our role, as the manufacturers’ organisation, is to shine a light on the hard-working, dedicated businesses up and down the UK who ‘Make it Britain’.

To do this, we are joining forces with Siemens to host a free conference at the Hilton Hotel, Liverpool, L1 8LW on Wednesday 25th June. This will bring together senior industry figures, business leaders, opinion-formers, media commentators and policy influencers to share their insights on the future trends of UK manufacturing:

  • The Future of Manufacturing: can Britain lead a new industrial revolution?
  • Four sides of Make it Britain  
  • World class skills and talent for the UK.

Our aim is to celebrate, challenge and engage. We want to open eyes to new opportunities in manufacturing, such as re-shoring, and open up the future of manufacturing to debate.

But more importantly, we will be making sure that manufacturers are centre stage – that the men and women who ‘Make it Britain’, who are making our sector the huge success story it is today, get the support and recognition they deserve.

To book your free place or to find out more, visit: www.eef.org.uk/ifb

European steel day infographic #EUsteel14

Felicity Burch May 15, 2014 08:35

Today is European Steel Day and to celebrate we have made an infographic about EU steel production.

Click on the image to enlarge:

 

 

Growth forecast upped in today's Inflation Report

Rachel Pettigrew May 14, 2014 12:26

Today’s Inflation Report contains no major surprises. The backdrop is one of continued strong performance of the UK economy – output has been growing, unemployment has continued to fall and inflation remains close to the 2% target. In light of this, the Bank has boosted its growth forecast and maintained its inflation forecast over the next 5 years.

The forecast for GDP growth has been raised over the medium-term.

The Bank of England are still forecasting GDP growth of 3.4% in 2014 but have raised their forecast for 2015 by 0.2 percentage points to 2.9%.

Mark Carney said that there are signs of greater balance to growth, which will underpin the expansion in the economy. The UK economy is showing signs of moving away from such a strong reliance on household spending and is seeing a greater contribution to growth from investment. However, the bank remains cautious about productivity, which has yet to show a material pick-up. The forecast and expectations of a more balanced picture of growth does rely on productivity growth improving gradually over the forecast horizon.

There is still a lot of uncertainty and risk to the outlook, which relies on a pick-up in productivity and real incomes, and continued recovery in business investment. The level and path of slack in the economy is another big unknown and there are a range of views on this within the MPC. Internationally there are also a number of risks such as the adjustment needed in the Euroarea, financial market stability and the expansion in the shadow banking system in China. 

Inflation is expected to remain at or slightly below target over the forecast period

Overall, the inflation forecast is largely unchanged. Inflation is expected to be on target at the end of the forecast period in three years’ time. The interim path for inflation will likely see it stay slightly below target, with pressure from Sterling’s appreciation expected to put downward pressure on inflation over the next few years. See our blog yesterday for more info on the exchange rate.

What about the bank rate?

Carney indicated that we have edged closer to a rise in the bank rate. The actual path of the Bank rate will depend on economic conditions and is likely to be both small and gradual. Carney also said that the Bank rate would likely remain at or around historic lows, which leaves quite a wide band for speculation.

A sterling performance?

Neil Prothero May 13, 2014 12:18

Solid growth in manufacturing and across the wider UK economy over the past year has helped to propel sterling to a five-year high against the US dollar and on a trade-weighted basis. A sign of economic strength or a cause for concern?

Recent trends

After a long period of overvaluation, sterling's real trade-weighted value declined by 30% between mid-2007 and early 2009, falling below its long-term average. This was driven by economic weakness and sharp monetary policy loosening. Sterling recovered some ground in 2010-12, before weakening again in early 2013 amid renewed (if unfounded) concerns over a "triple-dip" recession. Since June 2013 sterling has strengthened steadily—by around 10%—in response to an unexpectedly rapid rebound in UK output growth.

Sterling real effective exchange rate
(Jan 2005=100)

Source: Bank of England.

In trade-weighted terms the currency remains 19% below its pre-crisis level. The decade up to 2007 was an anomaly, however, during which sterling traded well above its long-term trend—in the process doing substantial damage to the tradeables sector of the economy. At such a level, investment in manufacturing in the UK was largely unprofitable for all but the most price-insensitive products. Partly as a result, Britain ceded more global market share in manufactured goods than almost any other OECD country during this period.

Viewed over a longer perspective, the current value of sterling is broadly in line with its 1992-97 average.

For the most part, sterling has followed a similar trend against the dollar and the euro since the crisis: weakening sharply against both currencies in 2008-09, recovering moderately in 2010-12, falling back slightly in early 2013, and then strengthening over the past year. More recently the picture has differed. Since May 2013 sterling has strengthened by around 10% against the dollar, compared with a more modest 3.5% against the euro. The respective US$:£ and €:£ exchange rates are each still around 20% weaker than their pre-crisis peaks.

Standard theory or new reality?

Policymakers are generally happy for sterling to weaken, in the belief it will give a shot in the arm to the export sector—via cheaper UK goods in world markets and improved competitiveness—and support a rebalancing of the economy towards increased trade. This explains some recent unease in the Bank of England at the strengthening of the pound, amid fears it could hinder the recovery.

But the recent story in the UK casts some doubt on whether traditional exchange-rate theory still holds. Despite the large 2008-09 depreciation, there has been no significant change in the long-standing pattern of UK trade, whereby a large deficit on trade in goods is only partially offset by surplus on the services balance. The value of UK exports has remained broadly flat since mid-2011.

Source: Office for National Statistics.

A long period of weak demand in key export markets has undoubtedly been a major factor. But there are likely to be other explanations too. UK exporters’ relatively low exposure to stronger demand in emerging markets; a heavy reliance on key commodity imports of energy and food, the costs of which increase as the currency weakens; the UK’s comparative advantage in services and high-value goods, which are less price-responsive; rising incidence of crossborder trade within larger firms, implying less sensitivity to the exchange rate; a loss of relative competitiveness with Germany (which is continuing to bear down on labour costs) and the US (where a shale gas revolution has sharply reduced energy costs); and ongoing structural issues affecting non-price competitiveness in the UK, related to workforce skills, access to finance and investment in infrastructure.

There is an argument that the UK’s export performance through and since the crisis would have been far worse had the pound not depreciated sharply during the crisis. But a case can also be made that with firms’ increasingly globalised supply chains, offshored production, and transactions in non-sterling markets, the modern economic environment in which firms operate is very different from standard textbook models.

Heading higher?

The question facing policymakers and exporters alike is if the sharp depreciation in 2008 didn’t support much of an export revival, how much of an impact will be felt from the recent strengthening of sterling?

It has clearly brought some benefits to the economy. An appreciation of the pound has reduced import costs across the board, not only driving down CPI inflation (in the process boosting households’ purchasing power and thus supporting domestic demand) but also manufacturers’ input costs, which were down 6% year on year in March. In addition, as a stronger exchange rate is an implied monetary tightening, this may push back the timing of a possible interest rate rise by the Bank of England, holding down firms’ borrowing costs.

As things stand, the stronger pound has probably been more of a help than a hindrance to the recovery. But if sustained, it is possible that sterling strength could begin to threaten the process of rebalancing and weigh on overall activity, particularly once levels of pent-up demand start to fade. With UK economic data still robust and investors eyeing up the prospect of rising interest rates, the expectation—over the near term at least—is that sterling will continue to appreciate against both the dollar and the euro.

Exports start to rise as UK factory output hits a high

Rachel Pettigrew May 12, 2014 10:31

The export dashboard looking at the most recent official trade statistics was published today. The latest data shows goods exports rose in the month of March but this was not enough to offset weakness earlier in the quarter.

Analysis and dashboard first published in today's Daily Telegraph

Last Friday the Office for National Statistics released trade figures for March along with the first quarterly trade statistics for the year.

The data again presents a mixed picture of export performance, with some bright spots against a continued decline in the value of goods exports.

Total goods exports rose a healthy 4.9% in the month of March 2014, but this improvement was not enough to offset weakness earlier in the quarter resulting in overall goods exports falling in Q1 2014. Therefore, these figures imply net exports will be a drag on growth in the first quarter of 2014.

Positively, we saw another narrowing of the goods trade deficit in the first quarter of this year, driven by an improvement in the trade balance with EU countries. However, as with last month, this quarterly improvement was once again driven by goods imports falling at a faster pace than goods exports.

Industrial production figures were also released last week and showed strong momentum in the manufacturing sector, which is responsible for approximately half of the UK’s overall exports.

This strength has led to manufacturing output reaching its highest level in more than two-and-a-half years and highlights the sector’s pivotal role in supporting the UK’s recovery.

EEF’s Executive Survey 2014 and Business Trends Survey show manufacturing firms are confident of further production gains throughout the course of this year. Not content to just wait and see how export demand develops, manufacturing executives are actively seeking to improve their opportunities overseas and minimise risks and uncertainty.

Building resilience by selling into new markets and actively boosting their marketing efforts overseas are some of the ways in which manufacturers are responding to the economic environment.

Boosting UK exports will require continued and concerted action from businesses as well as consistent support from government.

Eurovision - an alternative version

Madeleine Scott May 09, 2014 14:00

Eurovision - a topic hotly debated in this office and quite possibly yours too.

And I think I can hear some distant chatter and questions... What's that? How would the Eurovision finalist countries fare against each other across a number of interesting industry-related comparators?

Well ask no more...

Here are the Eurovision finalist countries and how they rank over four indicators from World Economic Forum's Global Competitiveness Report.

The top three (green) and bottom three (red) in each category are highlighted.

Finland can be crowned winner in this competition, with three top-three places across the four areas of: exports as a percentage of GDP, production process sophistication, company spending on R&D and the availability of scientists and engineers.

Good luck to all on Saturday!

Eurovision finalist countries across industry-related competitiveness areas, rank out of 149 countries

Source: World Economic Forum, The Global Competitiveness Report 2013-14

NB: Belarus and San Marino are Eurovision finalists but are not included in the WEF report

Tags:

Disclaimer
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.

We welcome and encourage comments, but we reserve the right to remove any that are offensive or irrelevant. We are not responsible for the content of external internet sites.

About EEF

EEF helps manufacturing businesses evolve and compete.  We provide business services that make them more efficient and management intelligence that helps them plan.  Our work with government encourages policies that make it easy for them to operate, innovate and grow.

Find out more at www.eef.org.uk