EEF blog

Insights into UK manufacturing

Is Cable's strike warning justified?

Jeegar Kakkad June 06, 2011 12:51

You'll have probably seen coverage that the Business Secretary has cautioned unions of the consequences of strikes this autumn (if not, take at a look at the BBC, Guardian or FT (£) coverage).

Far from an attack on unions, Vince Cable's speech was more moderate, according to FT Westminster:

"We are undoubtedly entering a difficult period.  Cool heads will be required all round.  Despite occasional blips, I know that strike levels remain historically low, especially in the private sector.  On that basis, and assuming this pattern continues, the case for changing strike law is not  compelling.

... 

However, should the position change, and should strikes impose serious damage to our economic and social fabric, the pressure on us to act would ratchet up.   That is something which both you, and certainly I, would wish to avoid."

While the public sector unions have promised strike action, it's worth taking a step back and looking at how the number of labour disputes and the days lost to strikes have changed over time.

And what you see is that the number of stoppages and days lost has plummeted since the 60s, 70s and early 80s.

Across those three decades, the UK averaged 213 stoppages per month. In the Nineties and Naughties, it dropped to just 23. The numbers of days lost fell sharply too, from nearly 656,000 working days lost per month (!) in the 60s, 70s and 80s, to an economically less harmful 55,000 per month in the last two decades.


Labour disputes drop over the past two decades, working days lost (000s) and total number of stoppages 
Source: ONS

Breaking this data down by public and private sector, throws up an interesting quirk. Although there's no statisical difference between the number of public or private sector work stoppages due to labour disputes, there number of days lost due to public sector stoppages is 7.5 times that of private sector stoppages. There will undoubtedly be valid economic and political reasons behind this large gap, but one very obvious and basic reason is that more workers are affected by a public sector labour stoppage, meaning more days lost.  (ONS don't provide data on number of workers affected by type of industry, or I would have used that stat instead).

In the context of the current rocky recovery, a sharp pick up in the number of public sector stoppages would put the government on gaurd given the potential scale of the impact and the risks to an already rocky recovery.

Hence the Business Secretary's words of caution today. But historically speaking, we'd need to see a 1300% increase in the number of days lost to public sector strikes and a 2800% increase in the number of stoppages before we got to 'autumn/winter of discontent' levels.

(NB: It's worth quickly noting the minimal level of private sector labour disputes during the incredibly painful recent recession. In manufactuirng, good relationships between the shop floor and management during the downturn has helped drive the productivity boom behind the sector's recent success.)

No difference in the number of stoppages due to labour disputes between public and private sectors, number of stoppages due to labour disputes
Source: ONS

On average, public sector industrial action results in 7.5x more working days lost than in private sector, days lost due to labour disputes (000s)
Source: ONS

 

Is there a rough ride ahead for an already beleaguered UK housing market?

Jeegar Kakkad June 02, 2011 16:23

On Wednesday, I flagged up a Morgan Stanley (via the always brilliant FT Alphaville) call that UK house prices could fall by 10%.

Well, here's the details behind that Morgan Stanley forecast. The key points?

"The supply recovery looks likely to be relatively weak, but we think that demand will be dampened by continued weak real household disposable income growth and likely rising mortgage rates. 

...

Mortgage spreads...[and]...real interest rates are also likely to be volatile. In the medium term, we think that inflation pressures will be relatively strong on average, prompting further rate rises from the bank as it tries to get inflation back to target. 

However, with the real economy continuing to go through a period of transition towards being a more export- and investment-led economy and the banking sector likely undergoing significant changes too, growth and financial conditions may fluctuate more than in the pre-crisis years and increase the volatility of any interest rate path."

Good thing I just bought a house, huh? *gulp*

 

Is the US economy in a holding pattern?

Jeegar Kakkad June 02, 2011 15:30

That's the view of Brad de Long, who says that the weekly US unemployment insurance claims (similar to the Claimant Count in the UK) are flashing a big 'Stalled Recovery' sign.

Or as Paul Krugman shows it:

What are the manufacturing PMIs tellling us?

Jeegar Kakkad June 01, 2011 10:23

The recent run of manufacturing PMIs suggest that manufacturing is coming off the boil after nearly two years of solid growth.  The survey again highlights the weakness of the domestic market, reflecting the squeeze on households and government spending. 

However, as strong overseas demand has played a dominant role in the recovery of manufacturing, the softening in output growth reported across much of Europe and the BRIC economies could signal a choppier outlook for the rest of this year. 

The question is whether the positive trends in recruitment being reported across the sector give us cause to look through some of the external and temporary factors that will have dampened activity over the past couple of months and whether these indicators will simply begin to normalise after a strong rebound in the months ahead.

FT Alphaville on housing market woes

Jeegar Kakkad June 01, 2011 09:52

It's worth checking out a few blog posts from FT Alphaville on the state of the UK and Chinese housing markets.

The first flags up UK house price gloom, citing a Morgan Stanley report that forecasts a 10% fall in house prices by the end of 2012.

The second set looks at the Chinese housing market. An FT Alphaville post flags up the rising housing inventories in China, citing one forecast for 15 months of inventory by the end of this year. The analysis points out that some cities have a 7-year inventory of unsold property.

The kicker comes from an FT article on the importance of the Chinese real estate market to the global economy. According to the article, China accounts for 50% of global commodity consumption. But two-thirds of China's steel demand, for example, comes from the real estate market.

If construction slows in response to rising inventories and official concerns for inflation, then commodity price rises could ease. But as the article points out:

"Whether China’s real estate market is a bubble that could pop, knocking out Chinese growth and shaking the world’s economy, is a question that is being asked by everyone from Brazilian iron ore traders to hedge fund managers in the City of London.

And while there is no consensus among economists and analysts over whether rapid price rises and a big construction boom do constitute a bubble, there is serious concern among some Chinese officials and recognition from almost everybody that the current levels of growth are unsustainable over the long term."

 

Could skills shortages push up manufacturing pay?

Jeegar Kakkad May 31, 2011 16:44

Having been out of the office for a couple of weeks, I've spent yesterday afternoon catching up on last week's economic data when the vacancy figures (which Felicity flagged up last week) got me thinking.

Manufacturing vacancy rates (i.e. openings per 100 employee jobs) have been on the rise over the past year, up from just 1.1% in April 2010 to 1.7% this April. Rising vacancy rates area good and worrying signal for the health of the industry. 

Firms tend to recruit only when output and orders are expanding and they're are, at minimum, modestly confident about the next few months. This is why manufactuirng added a net 14,000 jobs in the fourth quarter of 2010.

But if rising vacancy rates reflect skill shortages, that could help push up wages. For example, in the rush of the downturn, vacancies plummetted as firms were focused on holding on to skilled workers. This helped push wage growth down, as employees were took pay cuts, in large part to keep their own jobs, but also because there weren't jobs elsewhere.

Now coming out of the recession, we see that vacancies and wage growth are again, moving in tandem (except this time around it looks like wage growth is slightly ahead of vacancies). This could be because firms are setting wages for the year ahead, and are factoring their recruitment plans. It also reflects that firms are rewarding staff that stuck through short-time working and pay cuts.

But the rapid rise in the vacancy rate, coupled with anecdotal evidence of skill shortages, suggests that vacancies could be yet another factor that could lead to higher wage growth.

Moving in tandem?
3-month average pay settlement (% annual increase) and manufacturing vacancy rate (vacancies per 100 employees)

Source: EEF & JAM Recruitment Pay Bulletin and ONS

 

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.

 

Manufacturing is punching above its weight

Jeegar Kakkad May 13, 2011 09:00

According to official data, manufacturing output grew by a modest 0.2% in March. Output was up by 1.1% on the quarter - which was no snow-bounce, as output was up 1.1% in q4 as well.

Another solid quarter of growth, however, means that UK manufacturing is the biggest source of growth in the economy. Manufacturing accounts for around 13% of the economy. But according to official statistics, it has accounted for 33% of the economic recovery.

Manufacturing is punching above its weight, and the economy is benefiting in terms of jobs and investment.

Share of GDP
 
Source: ONS & EEF

Share of growth since the recovery ended

Source: ONS & EEF

While a meek February and March are cause for concern, manufacturing output is still 8.5% below its pre-recession peak, leaving plenty of fuel in the tank drive growth in the coming months.

 

Plateau-onomics: An economy on the mend?

Jeegar Kakkad April 27, 2011 10:13

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.

 

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.

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