Posts Tagged ‘British Chamber of Commerce’

When the UK economy was recovering in 2010 a lot of people assumed the downturn was over, that the bad economic times were drawing to a close. This column often expressed puzzlement. The markets were buoyant, but the reasons unpinning their enthusiasm seemed as solid as an especially ethereal ghost. This time it is happening again, but are there better reasons for confidence?

Actually you can really put the confidence into categories. There is confidence based on reality; based on very exciting developments. And there is confidence based on the same old ills that got us into trouble in the first place.

Recent surveys and other data have been promising. See: Can this be true: “impressive stuff on UK economy”? 

But dig deeper and there are other reasons for optimism. Take the car industry. UK car exports have soared by 178 per cent since 1998. Over the same time period, car imports have risen by 102 per cent.

The growth in exports has been constant too. In Q1 1998 they were worth £2.2 billion; in 2005 £3.2 billion; they passed £4 billion in 2008 and in Q1 of this year they were worth £6.2 billion. In fact between 1998 and the first quarter of this year, there have only been three quarters in which exports of motor vehicles exceeded imports, but those three quarters all occurred in the last 15 months. And as is the case that US companies are, as it were, re-shoring or bringing their manufacturing back to their home country, much the same thing is happening in the UK, albeit on a smaller scale, and lagging somewhat behind.

Recent Purchasing Managers’ Indices (PMIs) and a survey from the British Chamber of Commerce both point to rising exports, while data from the ONS shows that exports to China have increased seven-fold since 2002. Growth in exports to the rest of the BRICS has not been so fast, but has nonetheless been impressive. In December 2012 the BRICS collectively represented the UK’s third largest export market, behind the US and Germany. Okay imports have risen too, but in recent years the pace of export growth to the BRICS has been greater than import growth.

For years the UK relied on exporting its wares to the Eurozone. It was generally agreed that the UK needs to re-balance from consumer to export led growth, but that is not an easy thing to do when your main trading partner is in economic depression. It has taken time to reduce our reliance on this region, but at last this appears to be happening.

Looking further forward, 3D printing may provide a new opportunity. Retailers may start making clothes on demand, and shop assistants could become experts in computer aided design. We may even see the return of craftsman on the high street, making products for niche markets or on demand, using 3D printing to make products as cheaply as was once only possible with assembly line production.

Although there are reasons to be cautious about a buoyant housing market, it does appear that construction is set to take off, quite significantly.

Recently, Capital Economics said: “While some economists fear that the economy’s underlying growth rate is now as low as 1 per cent, we think that it will revert to its pre-crisis average of about 2.5per cent. Demographic developments should remain favourable. The rate of technological progress should remain strong. And the reduction in the role of the public sector in the economy will create opportunities for more efficient firms.”

But, and this is the really promising bit, Capital Economics reckons growth will be around 4 per cent a year in the UK during the second half of this decade as the economy catches up with potential after years of operating below potential.

So far so good. But what are the catches?

Well there are several. For one thing, wages are still not growing as fast as prices. This means that workers are finding that month on month they are worse off than they were a year previously.

Here are two more catches and they go like this: UK house prices are too high, and UK households are in too much debt. See: Is that a sword of Damocles hanging over the UK housing market? 

© Investment & Business News 2013

Adam and Eve and Pinch Me went down to the sea to bathe, Adam and Eve got drowned, so who do you think was saved?” Answer: “Pinch Me,” of course. And pinch me and you and cynics and optimists alike may be called for after the latest surveys on the UK economy.

Take a look at some of the words/phrases used to describe the data – in ascending order of magnificence they include: “decent”, “highest level”, “encouragingly”, “even stronger growth possible”, “all time high”, and “impressive stuff”.

So what has happened? Are we dreaming, or indeed do we need to take the latest news with a pinch of salt.

Let’s start the story with the Purchasing Managers’ Indices or PMIs, produced by Markit/CIPS and relating to manufacturing, construction and services.

The story of the latest manufacturing PMI was told here yesterday. In summary: the latest manufacturing PMI from Markit/CIPS, out on July 1, was 52.5 (any score over 50 corresponds with growth). It was the highest reading for the index in 25 months.

A sub-index tracking new orders rose to its highest level since February 2011.

Now let’s move onto construction: the latest PMI tracking UK construction in June, out on July 2, rose to 51, which is the highest reading since May 2012. The rate of new order growth accelerated since May and was the strongest for just over a year. Anecdotal evidence pointed to signs of an upturn in underlying client demand and stronger levels of new work in the house building sector.

Then there is the big one. In the UK, services remain the most important sector. The Business Activity Index recorded 56.9 in June, up from May’s 54.9 and the highest reading for 27 months. The index has been above the 50 no change mark for six months. Confidence regarding future activity was also retained, with expectations at their highest for 14 months.

So, put all that together and what do you get?

The all-sector PMI, measuring output across the private sector economy, rose for the fourth month running in June, up from 54.4 in May to 56.0, its highest since March 2011. According to Markit, the recent readings are roughly consistent with GDP growth accelerating from 0.3 per cent in the opening quarter of the year to 0.5 per cent in the three months to June.

Markit said: “Encouragingly, growth in the second quarter is looking more broad-based than earlier in the year… Even stronger growth is possible given the recent flow of upbeat official data. The upturn in business activity was fuelled by inflows of new business growing at the fastest rate since September 2007.”

“Firms took on more staff at the fastest rate since October 2007,” continued Markit. “The increase was concentrated on the services sector, where hiring was the strongest since August 2007. A more modest gain in construction was nevertheless the best recorded since September of last year, while the manufacturing workforce was more or less unchanged.”

Richard Driver, Caxton FX analyst, said: “This really is impressive stuff – the services sector has outstripped market expectations time and time again this year.”

While Martin Beck, UK economist at Capital Economics, said: “It looks increasingly likely that GDP growth in Q2 will turn in a decent performance.”

But the PMIs were not the only bringers of good news. An index from the British Chamber of Commerce measuring service export deliveries rose to +36%, which was the highest level since the survey began in 1989.

The reasons for this surge are not entirely obvious.

Wages growth still lags way below inflation, and for some time economists have argued that the UK will only see sustainable growth once real wages rise. You could understand the recovery if the UK had suffered some creative destruction, leaving a very lean and efficient manufacturing and services sector. But this has not happened, and poor growth in UK productivity makes it all the more puzzling.

It may be too soon to start giving reasons for this apparent recovery or to say whether it will last, but for the time being at least, the news is good.

© Investment & Business News 2013