Archive for UK economy

You can’t prove anything with statistics!

Posted in business with tags , , on March 15, 2013 by Tom Leatherbarrow

manufacturingThe Office for National Statistics manufacturing figures released earlier this week make for dire reading, but I wonder whether there are others in the UK’s manufacturing base who are as confused as I am.

I am not for one moment saying it is easy out there, but the 1.5 per cent drop in output paints a picture of doom and gloom above and beyond what I am seeing and hearing.

Traditionally, with a drop of that magnitude the smaller players are the ones to suffer first.  But whenever I have been to visit smaller engineering subcontractors in recent months the usual response to my question about business conditions has been “busier than ever” or “flat out”.

Bigger manufacturers are going equally as well and in conversation a senior manager at one last week it was clear that frustration with the statistical acronyms, be it ONS, EEF or CBI is close to boiling over.

In fact, he made a very interesting point, namely that his sales performance used to closely track the Purchasing Manager’s Index (PMI), but that in recent years there has been a noticeable divergence.  In other words, as the PMI has gone south his sales performance has been remarkably robust.

Why is this?  I’m no statistician, but I do wonder whether the official statistics are at the same time too generic and too heavily weighted towards manufacturers supplying under-performing sectors, like construction, and insufficiently weighted towards high growth sectors like aerospace.

Perhaps, in the same way that champagne has been dropped from the Retail Price Index, one or two of the more glass half-empty purchasing managers need to be shunted off into retirement.

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When it comes to financial credibility, the joke is on the ratings agencies!

Posted in business with tags , , , , , , on February 26, 2013 by Tom Leatherbarrow

Ratings agenciesThe extraordinary thing about the loss of our ‘cherished’ AAA credit rating is not that the Chancellor hitched his economic credibility to it in the first place.  Actually, that is fairly incredible but it isn’t the most incredible.

Neither is the most incredible thing the fact that acres and acres of newsprint have been devoted to this ‘disaster’.  Nor is it the fact that almost everybody (including Ed Balls), quietly agrees that it is not going to make a blind bit of difference to our ability to raise money in the capital markets.

No, the most incredible thing is that anybody is even remotely listening to Moody’s in the first place or for that matter their competitors namely Standards & Poors and Fitch’s.

In fact, when I heard that the AAA rating had been removed I laughed!

Why?  Because the main culprits for the financial meltdown in 2008 are as follows.  Firstly the global investment banks who played Russian roulette with the weapons of mass destruction now known as CDOs (credit default obligations).

Secondly, the major accountancy firms who declared the investment banks to be solvent, despite the fact that they had no way of knowing the potential liabilities of banks holding the CDOs.

Thirdly, the politicians who with a combination of either light touch regulation or total disregard for regulatory norms let the banks run amok.

Finally, the credit ratings agencies who gave credibility to the slicing, dicing and securitisation of dodgy mortgages in what became known as the mezzanine CDO market by giving them AAA ratings despite not having a clue what was in them.

In fact, by all accounts the conversations between the ratings agencies and the banks went something like this.

Banker:  “You know that stack of securitised mortgages you gave AAA ratings to a few months ago?”

Ratings agency:  “Yeah”

Banker:  “This one’s exactly the same”

Ratings agency: “OK then, you can have another AAA.”

No research, no questions, just throwing AAA ratings around like confetti.

The fact that these same people now pass judgement on the British economy is risible to say the least.

UK Economy: why does a stimulus have to mean big infrastructure?

Posted in Politics with tags , , on August 22, 2012 by Tom Leatherbarrow

There is a fair amount of talk that the UK economy needs some sort of stimulus to get it moving again.

Come 3rd September the drumbeat will only become louder, particularly with the party conference season just around the corner.

What is puzzling however is that all the talk of a stimulus involves the government dipping its hand in its pocket to fund big infrastructure projects, which usually means roadbuilding, rail, tunnels and new airports.

I sense the hand of the construction lobby in a lot of this.  Fair enough, construction output is at worryingly low levels and if any sector needs a stimulus it is the builders, but the danger is that the government, in sanctioning big infrastructure projects like a new London Airport in the Thames Estuary (Boris Island as it is already being called), places all its chips on a bet which is unlikely to come in before 2020 at the earliest.

This is a bit like the old trickle-down economics theory – big infrastructure equals jobs and ultimately consumer expenditure, but we will have to wait for it while our grindingly slow planning system works through the detail.  And, of course, it doesn’t always trickle-down.  The banks have been given billions in QE but most have missed their Project Merlin targets.

What is missing is the sort of direct stimulus which worked brilliantly during the dark days of early 2009.  With boiler and car scrappage or “cash for clunkers” as it was called in the US, consumers were given a “deal”, a voucher that could be cashed in and had direct monetary value.  What’s more, these sorts of schemes are pretty much revenue neutral.

I’m not saying I’m against big infrastructure, but it needs to be balanced by a direct consumer stimulus as well.  Without it, the big infrastructure projects will grab headlines for a day or so but then go into abeyance for years.  Just think HS2.

George splashes the cash but is that an elephant I spy in yonder room?

Posted in economics with tags , , , , on November 29, 2011 by Tom Leatherbarrow

Just a quick take on the Chancellor’s Autumn Statement. How can I do that when he has just begun speaking in the House of Commons you ask? Well, this statement has been so well trailed in the press that we know exactly what Georgie is going to say with the exception of how big the deficit actually is!

We know, for example, that the Chancellor is going to unveil an infrastructure investment plan worth at least £25bn, the lion’s share of which will come from pension funds. We also know that he has plans to unlock £40bn of bank lending for small businesses which the government will underwrite and from somewhere (loose change down the back of the Treasury sofa presumably) we’ve also found a whopping £400m fund to enable housebuilders to build up to 16,000 new homes. Oh, and not only is he going to splash the cash but he is also going to take less into the Treasury coffers by deferring a 3p rise in fuel duty which was due to be introduced in January.

All good news and with money so cheap at the moment, due to historic low interest rates, now is the time that business should be investing, if only companies could be sure that demand will hold up and also gain access to finance.

Which brings me to the crux of the problem. The elephant in the room this afternoon will be the Euro. Friday’s analyst note from Nomura spoke of ‘probable’ rather than ‘possible’ collapse, the question is when?

The nightmare for George is that all these good intentions are blown away and calculations are declared null and void by a monumental Eurozone default which requires a further bailout of the banks. In a week or a month’s time this Autumn Statement could have all the relevance of a little piece of paper waved around by a former Lord Mayor of Birmingham called Neville Chamberlain in 1939!

The new £50 note celebrates manufacturing – oh the irony!

Posted in business, economics with tags , , , , , , on November 2, 2011 by Tom Leatherbarrow

The Bank of England releases its new £50 note today. The note portrays two innovators with Birmingham connections, namely Matthew Boulton and James Watt, who were instrumental in bringing the steam engine into the textile manufacturing process.

“Boulton and Watt’s steam engines and their many other innovations were essential factors in the nation’s industrial revolution,” says Bank of England governor Sir Mervyn King. “The partnership of an innovator and an entrepreneur created exactly the kind of commercial success that we will need in this country as we rebalance our economy over the years ahead.”

You’ll have to forgive me for noting a certain irony with all of this. Business is facing an unprecedented squeeze on its lines of credit, which has brought investment to a standstill. The very entrepreneurs that the Governor wants to encourage can’t find the cash to put into new ventures. In this environment, Boulton and Watt wouldn’t have been able to raise a penny and yet the Bank of England, the lender of last resort, puts both of them on a new note as a celebration of our entrepreneurial and manufacturing spirit.

Back in the real world, figures for the British economy released yesterday showed that manufacturing had unexpectedly slowed during October. As one client put it to me recently, “the bubble hasn’t burst but it’s definitely deflating and we can’t find the hole.”

If we carry on like this, the ultimate goal of ‘rebalancing’ our economy will recede ever further away. What can the Government do? Well, in my opinion, the Government’s role is to create the right environment to encourage companies to invest – but all too often the environment in the UK, in particular interest rates, has deterred long-term investment. The irony now is that with interest rates at historic lows the banks won’t lend business any money!

If we are to rebalance then what extra support does industry need? Well I’ll first tell you what it doesn’t need, namely grants to individual sectors of the economy or to geographically specific areas. Government cannot pick winners, if history tells us anything it’s that. I would argue for something much more subtle, such as the ability to write down capital equipment costs against tax. That would be a boost which both Boulton and Watt would support I’m sure!

Another round of QE but will it work?

Posted in business, economics with tags , , , on October 6, 2011 by Tom Leatherbarrow

Very quick take on the Bank of England’s shock decision to order another £75bn of Quantitative Easing – a full month earlier than originally expected!

For the uninitiated (I envy you!) QE, as it is known, is the process of the Bank of England buying back Government bonds from the banks. In turn, this gives money back to the banks which should in theory ease the credit crisis as they use this money to lend to business and to consumers.

The big question now is, will it work? My own gut feeling is that it won’t. Regardless of what happens to the extra money given to the banks, and many people believe that too much of it goes on rebuilding their balance sheets or speculative trading abroad, you can’t help feeling that the Bank of England is giving drugs to the doctor rather than the patient.

What is clear is that certain sectors of the economy, such as the High Street, are suffering from a demand crisis. In other words, you and I are not buying anything because we are too busy tightening our belts. It may be simplistic, but the likes of Simon Jenkins in The Guardian have been arguing for some time that the banks cannot be trusted to lend and we should be using the old helicopter theory of economics in order to stimulate demand ie. take a helicopter up with sackloads of money and tip it out.

That should be fun to watch if nothing else, but at the moment I suspect many on the High Street will settle for a VAT cut!

Credit easing plan should be music to business’ ears!

Posted in business, economics, Politics with tags , , , on October 4, 2011 by Tom Leatherbarrow

Has George been listening? Yesterday’s announcement by the Chancellor that the Government is considering some “credit easing” appears to be a clear acknowledgement that he wants to get money going directly to companies because they can’t trust the banks to do it for them!

In case you missed it, the Chancellor announced that he was considering ways of getting credit flowing to business either by buying corporate bonds directly or by offering overdraft facilities and short term credit lines. He said: “I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small business. It is known as credit easing. It is another form of monetary activism. It is similar to the national loan guarantee scheme we talked about in opposition.”

A couple of points. Firstly, this is very good news for business and is an acknowledgement by the Government that we cannot go on much longer without access to credit. I have detailed in past blogs the difficulties companies are having buying capital equipment for example which is stopping them winning contracts and fulfilling orders. If the economy is to get moving again this is a very welcome step.

Secondly, it is a damning indictment of the banking sector that only seven months after the signing of the Project Merlin agreement which made banks promise to lend to business in return for allowing them to pay bonuses, the Government is being forced to step in. As Bob Peston on the BBC put it: “It’s proof the Treasury has given up hope that – in the absence of structural reform of the credit market – small businesses will find it any cheaper or easier to borrow, even in the longer term.”

There were plenty of people (and I was among them) who had deep concerns at the time that the fine print of Project Merlin had too many get-out clauses which would allow the banks to wriggle out of their commitments. Unfortunately it gives me no pleasure to say we were right!

My only question to the Chancellor is why did this take so long?