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Insights into UK manufacturing

Manufacturing growth keeps on rolling

Jeegar Kakkad December 07, 2010 09:48

Yesterday, EEF published the results of our Q4 Business Trends Survey.

The headline messages were that the manufacturing recovery was powering ahead, with two mechanical equipment and metal producsts coming out of our survey as two of the strongest performing sectors.

Today, National Statistics has published the October Index of Production - the official account of what's happened to output. Here are the headline results:

  • Output grew by 0.6% in October, and was up 5.8% from October 2009.
  • Growth was broad-based, with 10 of 13 manufacturing sectors showing growth.
  • Mechanical equipment and metal products were the two strongest performing sectors.
  • But output remains 9.4% down from pre-recession levels.

So yes, manufacturing continues to power ahead. But the challenge is maintaining that momentum into 2011, so that manufacturing can continue to drive the broader economic recovery.

2011 won't be an easy ride - the EU crisis is still in full swing and the rebalancing of the US-China economic dynamic will only begin in earnest next year as China's new five year plan begins in March.

The government's Growth Review, which was launched last week, will hopefully take a look across government to see where it can reform policies that are currently blocking growth, and where it implement new ones to support ambitious manufacturing companies planning for growth.

 

Irish sovereign debt woes and implications for UK exporters

Andrew Johnson November 30, 2010 16:16

Reading all the commentary on the latest Irish sovereign debt crisis there’s a lot of wise words being bandied around the UK about why Ireland should never have joined the euro. Like Greece earlier in the year some even darkly foretell that Ireland may eventually have to leave the monetary union to resolve its economic malaise.

There’s three questions that come to mind in response to these views:
• Is the currency union to blame?
• Is it realistic for Ireland to pull out of the euro?
• What’s the impact of the eurozone stress on the UK and in particular our exporters to places like Ireland?

On the first, most commentators agree that Ireland enjoyed a sustained real economy boost before succumbing to a debt-fuelled property boom. Currency union kept interest rates down from what they otherwise might have been. This exacerbated the debt binge – but it’s at least questionable whether it caused it. And although export growth tapered off at around this time, Ireland has remained consistently and massively in trade surplus.

Similarly New Zealand has its own currency but it also had large increases in private debt fuelled by cheap credit at the same time. But in New Zealand’s case the monetary authority tightened the interest rate screws to dampen the inflation it saw in housing prices, loans were made more expensive but still the bubble continued. And by having higher interest rates the exchange rate jumped up as investors and then speculators piled into the Kiwi. New Zealand’s export sector was badly squeezed and NZ has consistently been in trade deficit. The level and volatility of the exchange rate is consistently cited as an issue for NZ exporters.

Similarly the UK has its own currency, so the vicious euro hasn’t wreaked its havoc here either. But just like Ireland and NZ, private debt in the UK soared during the credit boom. And just like Ireland, major banks in the UK have failed. Surely not to the same extent but Robert Peston points out the difference is one of scale not kind.

This is not to say that joining the euro was a great idea; it may be just as many are saying that it was a bad call and that if Ireland wasn't in the euro now, everything would be rosy. But clearly it's more complicated than simply having the euro = bad/not having the euro = good. There are costs and benefits of both options and the debate at the moment is a bit revisionist and one-sided.

I think that the banking sector is a much more significant factor than the currency union for explaining the current mess. The bad loans in the Irish banks represent a failure of regulation of the financial sector. Ireland has the misfortune of being more exposed than most and the Irish Government guaranteeing all the Irish banks’ debts.

So what now? Should Ireland dump the euro, restore the punt and devalue its way to prosperity? A recent BBC article showed the fallacy in this logic. If Ireland dumps the euro and looks to devalue its new currency immediately, the value of its euro-dominated debt will go through the roof. This greatly heightens the chance of default and, anticipating this, investors rapidly withdraw their capital from Ireland before the cross-over to the new currency. That would make a bad situation worse.

What does all this mean for the UK can be boiled down to impacts on demand for our exports and systemic impacts on our financial system.
The Govt’s attitude so far is illustrated by its willingness to participate in the ‘bailout’ of Ireland. But many of Mr Osborne’s Conservative colleagues have questioned why the UK is helping.

Both Cameron and Osborne have stressed the national interest angle, the interlacing of the economies etc. But what if another bailout is needed or, more likely to involve the UK perhaps, the EFSF proves insufficient faced with multiple bailouts. Where then does the interest lie?

The stability growth of the eurozone matters for UK exporters. It matters directly; without it demand for our exports will be lower as eurozone consumers confidence and consumption dips. Even in its parlous state, Ireland still accounts for 6% of UK exports and perhaps more surprisingly, since the end of the recession, Ireland has accounted for 4% of UK export growth.

A similar calculus is possible with other eurozone countries, such as Portgual, supposedly next in line. Although Portugal makes up a much smaller proportion of UK exports, its share of UK export growth, since the end of the recession, exceeds 1%, which is not trivial.

And the more bail outs there are, the more the systemic health of the banking system comes into considerations. I don’t think it’s beyond possibility that it could be in UK banks’ (and via their lending to businesses, the economy’s) interests to support further bailouts, or a replenishing of the EFSF, if the situation became severe enough. The involvement of the IMF in the bailouts already suggests the importance of these issues is wider than just Europe or the eurozone.

What do q3’s GDP and investment figures say about rebalancing?

Felicity Burch November 24, 2010 09:50

Rebalancing is about achieving two things: internal balance (a balance between consumption and investment); and external balance (a balance between exports and imports). Today’s GDP and investment figures allow us to look a little closer at which way the scales of economic balance are tipping: 

 

Investment:
It seems progress towards an internal balance stalled a little in 2010q3: business investment fell by 0.2% over the third quarter. However, business investment was 2.6% higher than in the same quarter a year ago. A similar picture can be seen for manufacturing: although investment fell by 2.0% over the quarter it is 1.0% higher than in the third quarter of 2009.

 

Trade:
There is some good news on the external balance: the contribution to growth of net exports was 0.4%, which is an improvement on the last quarter, when net trade had no impact on growth, and the three earlier quarters when net trade had a negative impact on growth.

Currency wars debate: some conclusions

Felicity Burch November 16, 2010 10:23

A currency war is on hold – though it depends on the performance of the US Economy

 “The prospect of a full blown trade war is unlikely; it benefits nobody” … “it is not in China's interest to provoke the US”
World_First

Additionally, currency intervention… “May go off US agenda if QE2 works/economy grows” … “I suspect that a war will be averted”
JeffreyPeel

“The G20 is split - Washington consensus is dead. But sanity may prevail. No-one really wants no-win #cwars or #fx wars”
JeffreyPeel


Chinese currency depreciation is not win-win

JohnPullin asked “What will be effects on scarcity of raw materials including strategic metals?”

“that is defintely one of the aces up China's sleeve and should we see supply concerns come to the fore then the pressure will rise”
World_First

“If the West achieves its objectives re. Chinese revaluation may mean more expensive input costs”… “may be good for US steel and other traded goods though - China hasn't all aces”
JeffreyPeel

For UK manufacturers the largest impact of currency wars is likely to be price volatility

We asked whether the UK would “be collateral damage from fx volatility?”

“you have a point. To an extent it depends how much the Chinese are prepared to pump-prime and how much US resists”
JeffreyPeel

“we are advising manufacturing clients to hedge at these GBP levels to negate volatility and lock in profit”
World_First

 

Or, as we put it on twitter: "currency war is on hold as QE2 gets going & eurozone distracts markets. But..." "QE2 could go down like the Titanic if it hits China's raw materials iceberg." "So for now, UK manufacturers have little to worry about, except maybe protecting themselves from #fx volatility."

Currency wars: what does it mean for manufacturers? #fx #cwars

Jeegar Kakkad November 15, 2010 11:30

Although we've blogged on how global demand - especially from emerging economies - is helping drive the recovery in manufacturing, today's news out of Ireland is a pretty stark reminder of the risks posed by the global economy.

The G-20 meeting in Seoul managed only loose commitments to resolve the economic imbalances behind the currency war.

China is signalling it’s concern about inflation (which is code for their going to let the reminbi appreciate), which has knocked 5% off the Shanghai markets. This could have been typical pre-G-20 posturing, or it could reflect significant concern about rampant credit.

And now rumours are swirling of Ireland requiring, but shunning a bailout.

Where does this leave UK manufacturers? Many UK businesses I’ve talked to are concerned about the impact on three key points: demand, costs and profits, with further Sterling volatility being the worrying wildcard.

The concern about demand

If goods exports to China have risen by 44% since the start of the year, a trade war involving China and other developing economies, such as Brazil, could undermine the demand that is helping to drive growth in the UK. Most manufacturers worry that, if the currency battles slip into protectionism, then developing economy demand may dry up, profits could get hit or materials costs could rise (e.g. China produces 97% of global rare earth mineral supply).  

So far, so good. But what will happen to UK exports if the UK doesn't try to competitively devalue its currency? Would that help mitigate the damage from a trade war? Would the UK be viewed by China, Brazil and others as a benign trading partner, and so avoid the worst of the restrictions? Or would UK exports become collateral damage, caught in the crossfire between the US, China and others?

With the bulk of exports still headed for the EU, UK firms will have a decent buffer against such global headwinds. But the longer a trade war between the US and China persisted, the more likely the global economy - and UK exports with it - will suffer.

Profitibility could be hit 

Over the past decade, many firms protected themselves against a strong pound by buying and selling in dollars and eruos rather than pounds. This is standard practice for firms operating out of small, open economies and with exports making a big contribution to turnover. This way, if sterling moves, then firms take the hit on profits rather than on orders. This is why, as sterling fell during the recession, EEF's Business Trends survey showed improving profit margins on exports, even as world trade fell.

What's this mean for a currency war?

If the UK doesn't try to devaule it's currency, sterling will probably rise, for example, relative to the dollar. As discussed above, this will hit profitability, while potentially protecting orders. The knock to profits could eventually feed through to greater caution on investment and employment intentions.

If the UK tries to devalue the pounds, for example, through further QE, then profitibility could be temporarily protected, but at the cost of demand if protectionist measures begin to bite.

Cost of commodities

Over the past couple of years, a weaker dollar has meant rising commodity prices. Allowing sterling to appreciate could insulate UK firms from rising costs, while also helping to dampen down inflationary pressures in the UK (as import costs reduce).

But as we said before, getting caught up in competitive devaluations could mean getting caught out on access to China's supply of rare earth minerals.

A spanner in the works

The one issue that could through all this analysis - and firms' best laid plans - out the window is further exchange rate volatility.

Stirling volatility over the past year or so made planning for the recovery difficult, and another bout of it could keep cash-rich companies' on the sidelines of the economy until the G-20 manages to either resolve the currency crisis or settle the Doha trade round.

Currency wars: the best of the press

Felicity Burch November 11, 2010 15:43

In the G20 meeting in Seoul last week one of the key issues was how to avoid the currency wars which threatening global economic recovery. Although some agreement was made over continuing discussions, tensions have not dissapated. On Monday 15th November at 3pm EEF is hosting a twitter debate on the impact of currency wars on the UK, and UK companies. 

 

As a background to this, here are some key articles and blogs that have been written on currency wars in the last couple of months:

 

What is a currency war?

The BBC’s animated guide: http://ow.ly/388kiOr, if you’d prefer something to read, Stephanie Flanders’ summary is here: http://ow.ly/38bb7

When did this one start?

The first rumblings of currency hostility started in March 2010 when 130 bipartisan US Congressmen sent a letter last week to US Secretary of Commerce Gary Locke, calling for the government to identify China as a currency manipulator. However, it was Guido Mantega, Brazil’s finance minister, whose announcement on September the 28th branded competitive depreciations as “currency wars”. Reported by the FT: http://ow.ly/38bp8

Who is fighting whom?

The BBC’s Andrew Walker sets out the key players and the main battlegrounds: http://ow.ly/388oq What impact could currency wars have on the global economy?Competitive depreciation could represent a very serious risk to the global recovery. In particular, the global rebalancing which debtor countries are relying on to boost growth could be hindered by surplus countries accumulating excess reserves to boost their own exports. The FT reported here: http://ow.ly/38bOK

What has happened with currency wars in the past?

Douglas Irwin at the Wall Street Journal summarises how high tariffs and currency wars caused problems in the 1930s: http://ow.ly/38bxy

What happened at the G20?

According to the Guardian "the summit set vague "indicative guidelines" to measure imbalances" however "the leaders were unable to agree on how to identify when global imbalances pose a threat to economic stability, merely committing themselves to a discussion of a range of indicators in first half of 2011": http://ow.ly/39MMK  

 

Therefore, questions remain: What would trade wars mean for the UK? Crucially, how will UK companies be affected if exchange rates become increasingly volatile, or if currency tensions lead to increased protectionism?

 

Join the debate! On Monday 15th November follow @EEF_Economists on twitter, or use the 'hashtags' #fx and #cwars. The debate will start at 3pm and last for 45 minutes. 

Currency wars - the story so far

Felicity Burch November 10, 2010 13:19

 

Next Monday at 3pm EEF will be hosting a twitter debate asking "Does the UK have anything to fear from currency wars?"

The image below gives a summary of the 'currency wars' story so far. 

 

Click the image to view an enlarged version

To join in the debate follow @EEF_Economists on twitter, or the 'hashtags' #fx and #cwars. The debate will start at 3pm and last 45 minutes. 

Currency wars - timeline (updated).pdf (15.46 kb)

 

Trade figures look good: how can government maintain the momentum?

Felicity Burch November 09, 2010 09:41

The UK’s trade deficit in goods improved in September, falling to £8.2 bn compared with £8.5 bn in August.

The value of exported goods rose by £0.5bn over the month, and there was an increase in import values of £0.2bn. This is good news in both cases - increased exports mean there is a potential for more balanced economic growth, while continued demand for imports reflects strength in consumer demand.

The value of UK exports has grown markedly and is currently nearly 25% higher than at the low-point of the recession. Year on year growth in exports is well above the long-term average.

What is more, the outlook for trade is good.

Emerging markets are providing opportunities for export growth. Between 2004 and 2009 (the last complete year for which there is data) the volume of exports to BRIC countries rose by 77%. The proportion of UK exports going to China and India more than doubled. UK manufacturers are keen to take advantage of these opportunities and have been developing their presence in emerging markets. This is already paying dividends: according to UKTI in the first eight months of 2010 alone goods exports to China rose by 44%, to £4.5 billion. Even better news is that recent surveys have repeatedly showed companies reporting increased export orders. One thing is clear: exports have the potential to drive growth.

However, the global marketplace is likely to become an increasingly competitive environment. And the potential for trade wars is threatening the global recovery. The government is rightly keen to promote UK exports, something which is clear from current Trade Mission to China. The importance of trade missions should not be understated. However a long-term strategy for growth is what industry needs to provide the clarity and certainty that will enable the necessary investment to drive exports. Therefore, manufacturers will be looking to the Prime Minister to make good on his commitments to back industries where the UK has a competitive advantage in the government’s upcoming White Paper on growth, and the Manufacturing Framework.

Week in Review - 15th October, 2010

Felicity Burch October 15, 2010 10:15

↔ CPI CPI annual inflation remained unchanged at 3.1% in September, and has now been stable for three months. However, there have been significant upward and downward pressures on inflation in this time. The most noteworthy differences between August and September were a large fall in the cost of air transport and a sizable upwards swing in the price of clothing and footwear.In the year to August, RPI inflation was 4.6%, down from 4.7% in August.
 UK Trade The trade in goods deficit fell from £8.7bn in July to £8.2bn in August. Exports and imports both fell, though imports fell at a faster rate. The total trade deficit fell from £5.0bn in July to £4.6bn in August.
BRC retail sales monitor UK retail sales values were up 0.5% on a like-for-like basis from September 2009.
Food sales growth picked up a little. Clothing slowed but footwear sales improved, helped by cold wet weather and new autumn/winter ranges. Furniture and floor coverings was the only sector where sales were actually down on a year ago. Larger purchases in particular were affected by consumer uncertainty over job cuts and income prospects.
↑ CLG house prices UK house prices were 8.3% higher than in August 2009 and 0.7% higher than in July 2010 (seasonally adjusted). The mix-adjusted average house price in the UK stood at £213,116 in August.
↑ Labour Market Statistics The ILO measure of unemployment fell by 20,000 over the quarter to 2.45 million. The three-month unemployment rate fell to 7.7%. The claimant count measure of unemployment – which records the number of people claiming Job Seekers’ Allowance – rose by 5,300 to 1.47 million, the claimant count rate remains at 4.5%, following a slight rise last month. Despite the rise, there are 144,100 fewer claimants than at this point last year.

The week ahead 

Wed 20th: Public sector finances; 

Thu 21st: Retail sales; Trends in Lending  

Currency wars could leave all sides scarred

Felicity Burch October 06, 2010 09:44

As Brazilian finance minister Guido Mantega pointed out last week, and we noted here, 'currency wars' - where countries compete to deprecitate their currencies - are a risk to the recovery.

Today the FT reported that the head of the IMF, Dominique Strauss-Kahn has warned that competitive depreciation would represent a very serious risk to the global recovery. In particular, the global rebalancing which debtor countries are relying on to boost growth, will be hindered by surplus countries accumulating excess reserves to boost their own exports.

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.

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