EEF blog

Almost a week after they originally announced the scheme, the government released the full details of the £2.3bn package for the auto industry.

If you are interested in applying, you should keep two factors in mind:

Firstly, the government will charge a fee. The size of the fee will depend on your circumstances and the level of support you receive.

Secondly, you need to declare your interest by sending an email to the Automotive Unit at the Department for Business, Enterprise and Regulatory Reform. Be sure to include your company's name and address in full, email, telephone number and the full name of the point of contact.

The shadowy world of bankers and international finance have quite rightly taken a lot of criticism for triggering the credit crisis and then turning cap-in-hand for taxpayer bailouts.

Much of the public and political ire has been trained on easy targets like bankers' bonuses. But bonuses are like the tip of the iceberg. It's worth taking a few moments to look at what's hidden in the murky waters below.

And following his speech to the US Congress, that's exatcly what Gordon Brown wants to do: shed some light on the unregulated and unmonitored parts of the financial system that greased the wheels of the recent boom. One of the Prime Minister's key planks for global refom includes:

“reform of international regulation to close regulatory gaps so shadow banking systems have nowhere to hide”

But as Brad Setser at Follow the Money points out, this is an odd priority because it shines a light on London's (and the government's ?) potential failings:

"It isn’t exactly clear though why Brown needs the cooperation of the other members of the G-20 to do increase transparency here: an awful lot of the shadow financial system is based in the UK. If the UK collected the kind of detailed data that the US collects...a large part of the shadow financial system would either emerge from the shadows or a lot of banks – and bankers – would need to migrate. And given how much trouble has emerged from the shadows, a bit more transparency about what goes on in the UK might have helped the world’s regulators (and the IMF) do a better job of providing a bit more “early warning” of budding problems.

Think of the various less-than-transparent actors that have set up shop in London:

• Many sovereign wealth funds;
• A lot of the Special Investment Vehicles set up by US (and European) banks were legally domiciled in the UK;
• Some credit hedge funds; and
• And most importantly, a host of European banks with large dollar books (think of them as badly regulated credit hedge funds) ran a large part of the dollar exposure through London.

Three recent papers – one from the Bank of Spain and two in the latest Bank of International Settlements quarterly – have shed a bit of light on the true nature of the all the flows through the UK over the past few years. Had there been an international “early warning” system that was on the ball – and had the UK been willing to collect the data on flows through the UK in the face of inevitable complaints that such efforts would drive business abroad – it might well have picked up on some of these flows as a sign of brewing trouble in global financial markets."

It's hardly surprising news that the lack of regulation and oversight in London had a crucial role in the global financial crisis.

But given that the American sub-prime crisis also had roots in London, it does highlight the relative insignificance of bankers' bonuses and Fred Goodwin's pension.

Alongside cutting the official rate by half a point, the Bank of England embarked on the bold experiment of quantitative easing...those two unwieldy words that simply mean the Bank will try to boost the money supply by buying corporate debt and Treasury bonds (gilts).

Today's announcement provided some welcome clarity on what the Bank will actually be doing over the coming months:

What are they doing?
The Bank has been given permission to expand the Asset Purchase Facility and redefine its purpose. The total pot is now £150 billion. £50 billion of that will still be used to buy commercial paper and corporate bonds. But on top of that, the Bank will use £75 billion of new money to pump into the economy by buying gilts. The old Asset Purchase Facility (which was only agreed in January) has been suspended.

£150 billion! That sounds like a lot of money?
It is a lot of money, about 10% of GDP...but that simply reflects the the degree to which the ailing banking system has made businesses and consumers cautious about spending money. With less credit and less money flowing through the economy, the concern is that inflation will become entrenched below its target level. The Bank wants to pump money into the markets to keep that from happening.

What are the risks?
The UK badly needs a boost, but as Stephanie Flanders at the BBC points out, the more the Bank does the greater the risks it runs.

The primary risk is that the Bank and the Treasury start using the extra money to finance government's debt. In that scenario, the credibility of UK economy could be undermined, undermining the pound and driving up interest rates. That's why Mervyn King and Alistair Darling were at pains to put a wide gap between what the Bank is doing and the Treasury. This operation is being run by the Bank to meet the inflation target.

There's also the risk that the Bank will be too good at boosting the money supply...that inflation will begin to run away once the economy recovers. King and Darling were less clear on the exit strategy. That's a slight concern for us. There's no real clear framework for understanding whether or not their efforts have been successful in boosting the money supply and what happens if, in three months time or whenever the billions are spent, the economy is still struggling.

The real risk, though, is doing nothing. Interest rate cuts have lost their effectiveness in terms of boosting economic activity. Though a bold step, quantitive easing is a next tool in the Bank's armoury.

Will it work?
David Smith provides a benchmark for sucess:

"These things can work, though the evidence will have to be assessed carefully. There is a lot of noise in the broad money (M4) figures and in the bank lending numbers, as a result of the amount of lending still being channelled in to the troubled financial sector. The big requirement is for a return of underlying lending to something like normal levels."

By buying corporate and government debt, the Bank will automatically increase the amount of credit flowing through the economy. But once that money works through the system (and given the state of financial markets, that's not guaranteed!) it'll be up to banks to start lending again and to businesses and ultimately households to start spending.

Despite the exchange of letters between King and Darling and the proliferation of pundits giving their views, there is still a degree of uncertainty about how the next few months will unfold. Today's move is absolutely welcome, and the Bank appears to have set out a fairly clear and simple framework of what it is doing, but less clear about measures of success and how this operation to boost the money supply will be wound down once the economy recovers.

We'll do our best to track how effective the Bank is at boosting the money supply, so keep checking back here for more details and updates.

Changes in access to and cost of finance for UK's manufacturers, past 2 months
 
Source: EEF Credit Conditions Survey, Q1 2009

For more than a year EEF has been tracking what’s been happening to the cost and availability of credit for manufacturers. Our latest survey, of nearly 700 companies, shows little movement on either front.

Despite the seemingly unceasing activity to support the banking sector and the official Bank rate at an historically low level, 37% of companies reported an increase in the cost of finance in the past two months, virtually unchanged from the situation in November. Similarly problems with access to finance remain as parent companies tighten the purse strings and new lines of borrowing continue to dry up.

The clocking is ticking – loan guarantee schemes have been announced, but some are not yet up and running. We now need to see the details of the recent measures to support bank lending agreed swiftly and communicated clearly to businesses.

Just as worrying, however, is the ongoing and significant decline in the availability of credit insurance. Our survey showed that two thirds of manufacturers had seen credit insurance reduced or withdrawn in recent months, putting real pressure on supply chains. While we've heard that some form of intervention from government to underwrite credit insurance has not been ruled out – as we blogged earlier this week – ruling it in can’t be delayed much longer.

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:

Most of the time we just look to the US and Western Europe for our economic indicators and let's face it they are bleak. However, for some interesting international comparisons, worries from across the globe have been neatly summarised in The Washington Post.

At the time of writing there has been no official confirmation, but it looks highly likely that the steelmaker Corus will be announcing cutbacks to its global workforce, including a sizeable scaling back in the UK.

Corus, through UK Steel is a member of EEF.  While we never comment on individual companies, it is clear that the global steel sector has been hit by falling demand - particularly from carmakers, shipbuilders, construction and heavy engineering sectors.

The indications are that Corus will not close any of its four sites in the UK.  As has been widely reported, the company is asking for Government support to hang onto staff and train them in preparation for an upturn. Such support would take the form of a temporary wage subsidy; a similar scheme is already in place in the Netherlands, where Corus also has significant operations.

EEF has argued that such a facility should be available more widely.  (Indeed, the Welsh Assembly has already introduced a very similar pilot scheme, initially for the automotive sector.)  While we accept that this may be no more than a temporary solution - after all, no one knows when demand will pick up - and we have concerns about the red tape inherent in such a proposal, we believe that we have to avoid the mistake of the past and make it easier for companies to hang onto skilled workers.

The Government therefore has a choice:  is it better to spend taxpayers’ money on social security for such workers?  Or is it better to help companies retain, and retrain, them (while accepting that at the end they still may have to be made redundant)?

UPDATE 12.15pm: Corus have now confirmed the cutbacks.  They are talking about 3,500 jobs at risk across the company as a whole, with the bulk in the UK.