A plethora of city analysts, commentators and government ministers are busy making out that the UK economy is doing much better than the recent GDP figures showing the UK back in double dip recession (of course none of the ‘recession deniers’ forecast the double dip and all back the government’s austerity drive).
And in dismissing the official figures, they point to various upbeat surveys suggesting that manufacturing and the wider economy were expanding.
But the latest Purchasing Managers’ Index (PMI) figures for manufacturing put a serious dent in that argument. The PMI for manufacturing weakened markedly last month, and came in at its lowest level since December when the eurozone crisis was in full swing (a €1 trillion intervention by the European Central Bank has since brought the eurozone some time but little more). The PMI fell to 50.5 in April from a downwardly revised 51.9 in March, thereby just keeping the sector above the 50 level which separates growth from contraction. It was a disappointing result.
So much for that rebalancing of the economy towards making things. Manufacturing went into reverse late last year and start of this year, and despite much talk of its robustness, is now barely crawling forward. That’s mainly down to domestic factors: the squeeze on real incomes in the UK and an at-best flatlining economy (the Government’s austerity programme doesn’t help on that front).
Externally, the UK’s manufacturing base is also being badly affected by the recession in much of the eurozone. Over a half of the UK’s exports go to the eurozone, and the PMI data showed the sharpest fall in new export orders since May 2009. In addition, exports may well be being affected by the recent rise in the value of sterling.
Sterling has appreciated by 10 per cent or so of late, with the pound reaching its highest level in over two and a half years. This has in part unwound a previous 25 per cent depreciation since 2008 which has boosted the competitiveness of UK industry. That boost to sterling doesn’t reflect a vote of confidence in the UK economy but rather a flight to safety and away from holding the euro.
The Government had hoped for a ‘march of the makers’ that would help rebalance the economy and help the UK export its way out of recession. That was always far-fetched given how much we had allowed the manufacturing base to shrivel up in recent years; there’s simply not enough of a manufacturing base left to deliver the scale of export growth and rebalancing required. A much more supportive industrial policy was and is required to back such a rebalancing, but has yet to appear.
Of course, we can’t read too much from the PMI manufacturing figures for the wider economy as manufacturing now accounts for only 11 per cent of UK GDP (although a far bigger share of R&D spend and exports), but put alongside the CBI Distributive Trades Survey and reports from the Bank of England’s agents, as well as evidence on consumer confidence (or rather the lack of it) and there’s little sign of a pick up coming soon.
In fact, even with the recent improvement in the Nationwide Consumer Confidence Index, it remains stuck in recession territory at a figure of 53; around the same figure it was on back in November 2008. Consumers aren’t going to go out and spend, especially on ‘big ticket’ items, if they remain concerned about the state of their finances, especially when real wages are continuing to fall.
What we can say is that the second quarter of 2012 has got off to a bad start, and that there’s an increased chance of recession extending into a third successive quarter. What’s more, there will now be some serious doubts as to whether the 0.2 per cent fall in activity in the first quarter of 2012 will be revised upwards (and into growth), as many analysts have been suggesting, Andrew Sentence included.
Indeed, some of the same recession deniers are also busy casting doubt on usefulness of the preliminary estimates from the Office for National Statistics (ONS) because they are based on a sample. In fact, the ONS has consistently done a good job at this. Over the past 20 years the average quarterly GDP revision has been an upward adjustment of just +0.1 per cent. And since 2008 the average revision has been a downward adjustment of 0.2 per cent. So if this trend was repeated with the most recent quarterly GDP figures (a not unreasonable assumption) then the double dip we’re now in would be an even bigger dip, rather than the statistical blip that the recession deniers claim.