Manufacturing is experiencing above trend growth as it always does at this stage in the cycle. It’s like falling off a cliff and recovering from a coma, a recovery of sorts but still a long way off the top. An industry struggling to find its feet again is a rebalancing of sorts, but it is more like a prize fighter staggering to his feet after a near knock out punch. It is rebalancing George but not as you mean it. That’s verging on codswallop.
The manufacturing figures for March were released this week. After growth of 6.6% in January and 5.0% in February manufacturing growth was just 2.7% in March. In the month capital goods and engineering were up 7%, metal bashers were up by 4% but consumer durables were down by 3%. So is the manufacturing miracle over? What will happen to growth this year? Let’s face it, the growth in manufacturing is not evidence or a “rebalancing” of the economy, it is more like evidence of a hit and run victim regaining consciousness. It’s a recovery not a manufacturing miracle.
GDP growth in the first quarter was up by 0.5% compared to the final quarter of 2010 and up by 1.8% compared to a year ago. The preliminary estimate is in line with consensus forecasts. Ed Balls, Shadow Chancellor, said: “These figures show an economy that has flatlined since the autumn.” On the other hand, the Chancellor and the Prime Minister were able to claim both the 0.5% and the 1.8% year on year growth represent a positive growth out turn. It is growth and evidence of life but not as we need it for this stage in the recovery.
In 2010, the UK had a deficit on food of just 1.2% of GDP, add in the bill for raw materials and the deficit amounted to less than 1.5%. Yet the overall deficit on trade in goods amounted to 6.7% of GDP. Since 1983, the UK has been running a persistent deficit on manufactured goods which has compounded the trade deficit problem. In 2010, the trade deficit on manufactured goods amounted to -4.6% of GDP.
The surplus on invisible account could not cover the trade deficit. The overall deficit in goods and services was -3.3% of GDP. In Q4 alone the deficit was -4% of GDP. The situation is worse than 1931, 1948 and 1967. The UK needs a strong banking and financial services sector to offset the manufacturing deficit. This is no time to be bashing the banks.
Revisions to the trade data for Q4 2010 will provide little comfort to those anticipating an improvement in the trade balance. In fact it looks as the visible trade deficit is getting worse and the service sector is flagging in its efforts to offset the visible shortfall. The deficit in goods and services moved to an overall deficit of £15 billion in Q4 as the trade deficit soared to over £25 billion.
Since 2008, Sterling has devalued by 20% but there has been no discernible impact on the trade deficit as policy makers have hoped (and as we have consistently predicted). “The pound in your pocket” is being devalued by higher inflation especially on dollar denominated prices paid for food, energy and commodity imports from abroad. The devaluation will not lead to a rebalancing of the economy. Devaluation isn’t working, it never did.
The seasonally adjusted value of retail sales in January 2011 rose by 8.2 per cent compared with January 2010 and the seasonally adjusted volume of retail sales in January 2011 rose by 5.3 compared with January 2010. It’s a retail boom or is it? What is happening to food? Britain isn’t eating according to the official figures. Consumers having emptied the freezer in December must have started eating each other in January as sales fell by a further 2.7%. I love data and I love the ONS but something is happening to the numbers. Can it be that more and more food sales are going on line.
Retailers suffer worst December on record according to the Daily Telegraph as the retail sales figures for December were released by the Office of National Statistics. “British retail sales suffered their worst December on record as retailers battled with Arctic weather conditions and shoppers shunned higher prices.”
But food, what happened to food. Let them eat flake, or snowflakes presumably as food sales fell by 3.4% compared to December last year. That is the equivalent of one days destocking from the freezer as supplies came under pressure from families housebound. It is going to be a tough year ahead for retail, especially in household goods, retail sales were flat in December but the food figures should be taken with a pinch of salt.
GROSS domestic product will be stronger than expected in 2011 and the private sector is set to create the job growth to offset spending cuts.
Every one percent growth in GDP will lead to the creation of around 100,000 jobs according to the research and growth should be above trend in the recovery process.
The output gap will have no bearing on overall inflation despite the antiquity of the Bank of England Inflation model. Inflation will remain above target unless base rates rise to impact on Sterling appreciation leading to a reduction in import prices levels. Even then a revised target of 2.5% would be difficult to achieve.