EEF blog

So today's GDP estimate of 0.5% growth in the first quarter was, well, expected.

To certain degree, it won't set hearts and minds racing about the strength of the recovery. Nor will it send the markets to panic stations about a double dip.

Manufacturing remains the strong point of the recovery, with 1.1% growth in the first quarter. The service sector rebounded from the snow by growing by 0.9%.

But while we've avoided a return to recession, 0.5% growth won't settle nerves about the rest of 2011. As Joe Grice, Chief Economist at the Office for National Statistics says:

"Abstracting from the snow, we have an economy on a plateau."

Worryingly for the economy, that's plateau, as in stagnant growth...as in stagflation. The Monetary Policy Committee may feel justified in its stance on holding tight on interest rates, but it will worry about the underlying health of the economy: strong service sector growth in q1 is likely a rebound in activity from the snow. As FT Alphaville bearishly notes:

"Plateau isn't the word we would use of course. More stagnation, flat-lining, stalling in mid-air, that kind of thing. The ONS also called growth in Q1 2011 'essentially an arithmetic effect' which seems even more devastating."

What worries us here at EEF isn't necessarily what today's data says about where the economy is now, but what it says about the economy for the rest of the year. The UK will face some stiff economic challenges in the coming months:

• Fiscal austerity has begun (we've seen roughly the equivalent of 1.5% GDP cut back in the past 12 months) and will begin to weigh on the economy through the rest of this year.
• There appears to be no respite in rising oil and commodity prices.
• Supply chain disruptions from the Japanese earthquake will only begin to affect output in this quarter.
• The euro-zone crisis will only get worse unless Greece, Ireland and Portugal begin to restructure their debts (which will be painful enough).

The recovery could probably withstand a shock from any of these on their own. But the risk is that they combine to create a perfect storm that keeps the economy trapped on the plateau...or even worse, forces an economic retreat back down the hill.

 

The anticipation is over. After months of debate the Chancellor announced in today's budget plans to introduce a car scrapping scheme - which could be in place by as early as next month.

£300m has been allocated to the scheme, which offers £2,000 for motorists replacing a vehicle at least ten years old for a new one.

The funding will be shared by the car industry - with £1,000 to come from the taxpayer and the car manufacturers that sign up paying the other £1,000. The scheme will run until March 2010 - or until the funding runs out.

Unlike the European schemes, there are no restrictions on the new car being bought - it does not have to be a low-emission car. This is to help sales of luxury cars including Jaguar Land Rover and Aston Martin which are produced here in the UK.

This is welcome news for manufacturers - not just those in the automotive industry - but for the thousands of companies down the supply chain who rely on orders from the sector. And, as EEF research shows, there is pent-up demand in the UK and, with current exchange rates making UK cars cheaper, we may see an increase in UK-produced car sales.

But a lot will depend on how many car manufacturers sign up to the scheme.

 

Rather than wait for the government, Citroen has launched its own car scrappage scheme giving up to £2,000 to customers who buy certain new Citroen models.

It will be interesting to see if this has any impact on the Chancellor's decision in next week's budget...

 

Nothing but froth? 

If you haven't seen the story yet, Howard Schulz of Starbucks told a US news network that the UK economy is in a spiral, prompting a stern defence from the man tasked with recrafting the government's recession rhetoric, Business Secretary Lord Mandelson. 

Dan Roberts' business blog at the Guardian asks whether our cappucino economy should be pitied:  

"...before we resort to the jingoistic defence reflex, it is time to acknowledge that Schultz is merely reflecting the views of many international businessmen. Britain is fast gaining a reputation as the sick man of Europe. We might have all the same problems as everyone else (see here for the chasing pack), but they are proportionally bigger in the UK: Burst housing bubble? check. Bankrupt financial system? check. Collapsed consumer confidence? check. How would you like to sell a venti vanilla latte in this environment?

Americans are quick to distance themselves from a loser. Even the latest issue of Newsweek has a long piece telling us to get over our obsession with the 'special relationship' (summary: what special relationship?). Mandelson would do better to accentuate the positive rather than deny the negative. Anyone for a nice a cup of tea?"

All the more reason to move towards a manufacturing future...

 

The Conservatives have made a big policy announcement on their plans for regional and local government today. The Party’s Shadow Local Government Secretary, Caroline Spelman, also discussed these plans on the Today programme this morning.  This is important for business, because a lot of government support is delivered at these levels (and IPSOS/Mori are now giving the Conservatives a 20 point lead in the polls so these proposals could become reality sooner rather than later).

EEF has given a cautious welcome to the proposals.On the plus side, they include a number of very sensible ideas to get local authorities to take business growth seriously.  (This is clearly a good thing, as many companies will point out!) Local authorities would be able to lower business rates at will, raise rates with businesses’ approval (to pay for things like infrastructure improvements) and keep any extra revenues (relative to a baseline) from increased business growth.  The Conservatives have also pledged to review Empty Property Rates, an issue which has been a real concern for many EEF members.

However, and this is probably with the debate over Heathrow expansion in mind, they have also said that they will reverse the recent changes made to planning rules.  EEF supported these changes, arguing that they will speed up and depoliticise decision-making around critical infrastructure projects, like new power plants.  We would be concerned if we were to return to the days of long and drawn-out planning inquires, which simply cost a fortune and result in delays to critical infrastructure investments.

The Conservatives have also said that they will review the role of the Regional Development Agencies.  They have always been suspicious of the unaccountable nature of RDAs and point out that in many areas the Agencies are simply based on administrative, rather than natural, boundaries. To address this issue, a Conservative government would allow groups of Councils to come together to establish Enterprise Partnerships to take over the responsibility for economic development from their RDA. Importantly, the Business Secretary would have to be satisfied  that the areas covered by the new Enterprise Partnership reflect natural economic patterns and have strong business leadership, before they transfers the money currently spent by the RDAs. And the Conservatives have told us that where there is a demand, perhaps in an area with a strong region identity, some RDAs may continue to exist. 

EEF recognises that there are problems with the performance of some of the RDAs and that they do not always fit obvious economic or geographic boundaries.  However we believe that, for the most part, they provide business-led critical mass for economic development across regions.  Put another way they cover a big enough area to take an overview of region-wide problems and they are not encumbered by the politics of local government.  

Potentially the Tory proposals could mean that some areas will have local authority led Enterprise Partnerships, some will continue to have RDAs and some could have nothing at all (although this is not completely clear).  A Conservative Government would therefore have a big task to ensure that such a patch-work quilt of structures had strong business representation and did not lead to confusion and varying or overlapping priorities.  It may be that the answer is not to abolish the RDAs, but look again at their performance and, crucially, the areas they cover, while making them work more closely with local government to address the issue of accountability. 

 

 

 

 

 

 

This year's budget will be on the 22nd April.  EEF is just finalising our submission to government, which will focus on some of the urgent short-term measures needed to help manufacturers.  Once it's finished we'll post more details on the blog...