December 19 2012

U.K. manufacturing is down, construction is struggling, exporters are having a torrid time – and then there’s the eurozone recession. Here is a view of the current conditions in the U.K. manufacturing, housing, construction and banking sectors…

Powered by article titled “UK economy: the problem sectors” was written by Phillip Inman, economics correspondent, for The Guardian on Friday 7th December 2012 20.32 UTC


Industrial output is now at its lowest level since May 1992 and manufacturing is 20% down on its peak. Latest figures showed a month-on-month fall of 0.8%, far worse than economists had expected and the 16th consecutive month when manufacturing output was lower than the same month a year earlier.

The Office for National Statistics found most areas of manufacturing were on the slide, with chemical production and wood and paper manufacture leading the downturn.

A fall in the value of the pound and the opening up of new destinations for UK exports – such as Indonesia and Columbia – have failed to lift the sector, which is far more dependent on trade with the euro area than ministers would like. The British Chambers of Commerce said the sector remained well managed and prepared for an upswing, but needed more government help to boost exports to fast developing countries.


There may be plenty of cranes on the London skyline, but the construction sector outside the capital is dead. Commercial building, the lifeblood of most large firms, has failed to recover from the financial crisis. The hole in the heart of Bradford, where a Westfield shopping centre is already four years late, is an example of building projects that have remained strictly on the drawing board.

Civil engineering has suffered from a lack of infrastructure improvements after a near-£30bn cut in public investment spending. The CBI has urged the government to use the downturn to upgrade the road and rail network. The Treasury encouraging upgrades to the broadband network has failed to counteract falls in investment elsewhere.


The Bank of England has become increasingly frustrated at the unwillingness of banks to increase their lending to businesses and households. In the summer it set up an £80bn Funding for Lending scheme that allows banks to offer cheaper loans to customers. Banks have reported using the money to lower mortgage rates, but anecdotal evidence suggest older, more creditworthy customers have gained while first-time buyers remain on the sidelines. More importantly, many economists argue the loans on offer are small in comparison to the size of the problem.

The UK’s major banks remain in a dire financial situation and need to build up their capital reserves to protect themselves against another financial crash. The central bank governor, Sir Mervyn King, insisted earlier this month that UK banks were well-capitalised but said it would be “sensible” to improve their resilience further. He warned “an erosion of confidence” was damaging economic activity, creating “a spiral characteristic of a systemic crisis”.


British exporters are having a torrid time battling the headwinds of the slowing Chinese economy, the eurozone crisis and uncertainty in the US over the fiscal cliff (the tax rises and spending cuts timed for January which could halt US economic progress in its tracks).

According to the latest figures from the ONS, in the three months to October the country racked up its biggest trade deficit since records began. The trade gap widened to a record £28bn, from £25bn in the quarter ended July, the ONS said, as sales of goods into the rest of the European Union declined sharply.

George Osborne promised more help for exporters with loan and credit guarantees through the government’s UKTI export arm. But the sums remain small compared to the size of export orders and firms seem reluctant to take risks in the current economic environment.


Housebuilders have largely shed the debts acquired in the crash and become profitable again. But building remains at historic lows. The last time the UK built so few homes was in 1931.

MPs and business groups have called for a 1930s-style house building boom, but with no success so far. Ministers are planning to rip up planning rules to allow developers a clear route on greenfield sites, but even if this plan goes ahead, it will be some time before there are any spades in the ground.

Developers, which already have several years of plots on their books with planning permission, have refused to increase the number of new homes while customers are constrained by high mortgage borrowing costs. They blame the banks for withholding credit or charging too much for credit as the main reason for their inactivity.

Prices are slipping, putting another brake on investment in the sector. Halifax said prices are likely to stay flat next year after a 1.3% fall in 2012. Most families are unwilling to buy homes in a market where prices are falling, though buy-to-let investors have snapped up thousands of homes since the downturn, increasing the size of the rental market.

The eurozone

The machine at the heart of the eurozone is spluttering: the Bundesbank has sliced more than 1 percentage point off its forecast for economic expansion in Germany next year – highlighting severe aftereffects of the sovereign debt crisis.

The German central bank revealed the crushing blow to confidence and growth that has struck the euro area when it cut its projection for growth in 2013 from the 1.6% it had expected six months ago to a grim 0.4%. It also said the German economy, Europe’s largest, will grow only 0.7% this year, down from its previous forecast of 1%. The downgraded forecast shows Germany is no longer immune from the downturn in the rest of the currency bloc.

Separately, the German finance ministry said industrial output fell 2.6% in October, while manufacturing crashed by 2.4%, providing “further evidence that the economy’s backbone is quickly losing steam,” said the ING analyst Carsten Brzeski.

Without an expansive and confident Germany, it is almost certain the eurozone’s double-dip recession will continue into 2013, dragged down by severe contractions in the southern states.

There is also a feedback loop into UK trade should Germany suffer a prolonged fall in demand. Germany and the rest of the EU still comprise over 50% of UK exports, despite the government’s emphasis on redirecting trade elsewhere to rapidly developing economies in Asia, Africa and South America. © Guardian News & Media Limited 2010

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Bank of England’s policymakers voted 8 to 1 against pumping further funds into the economy despite ongoing economic weakness. The committee was concerned about the rising value of the pound which is testing its 2012 high against the U.S. dollar…

Powered by article titled “Bank of England votes against more QE” was written by Phillip Inman, economics correspondent, for on Wednesday 19th December 2012 11.57 UTC

Bank of England policymakers kept their hands firmly on the brake this month despite broad agreement that the economy remained weak and was likely to worsen slightly into the new year.

According to minutes of its meeting earlier this month, the monetary policy committee voted 8 to 1 against pumping further funds into the economy following a report that inflation is likely to stay above 2% next year.

The vote sent a clear signal that the global situation, the recession across the eurozone and the UK economy will need to deteriorate further before a majority of MPC members agree to boost the central bank’s quantitative easing beyond £375bn.

David Miles, the former City economist and external member of the MPC, argued there was enough slack in the economy to allow a boost to output without extra inflation, but his call for an increase in QE to £400bn was voted down.

Vicky Redwood, UK economist at Capital Economics, said the MPC was in “wait and see mode” and was likely to need a strong indication of a downturn before increasing the volume of QE.

“The committee’s comments suggest that more QE is not imminent. It noted that risks from the euro area seemed less pressing and that inflation was likely to remain above its target over the next year or so.

“But the MPC also gave the impression that it would not take much to tip the balance back in favour of more purchases. It noted that business surveys were consistent with flat output in the near-term and re-iterated its expectation that inflation would fall back to target in the medium-term,” she said.

The MPC has relied on its funding for lending scheme to increase credit in the absence of more QE. The committee said there were early signs of banks accessing the £80bn of cheap credit in the scheme for new mortgages and business loans, but little more than £5bn had been deployed so far.

A rise in the value of the pound was noted by the committee, which voiced concern that attempts to rebalance the economy towards exports was being undermined.

Howard Archer, chief UK economist at IHS Global Insight, said the MPC may decide to increase QE in the new year, if only to drive down the value of the pound relative to other currencies.

The Treasury’s decision to repatriate bank funds had also worked against an increase in credit, the committee said.

In November the Bank agreed to return coupon payments on the government bonds it had bought so far under the QE scheme, saying the transfer would be equivalent to more than £35bn worth of monetary easing.

However, in the minutes central bankers said the monetary impact of the transfer would be slightly smaller in the very short term than initially assumed, because it had led to a reduction in the issuance of Treasury bills rather than gilts.

Redwood said: “The government’s decision to use the transfer of cash from the QE fund to reduce the issuance of Treasury bills might imply less of a monetary easing than had gilt issuance instead been cut. Indeed, if we are right in expecting the economy to disappoint the MPC’s expectations, and eurozone tensions to re-emerge, then more QE is not too far off.”

Bank of England director Paul Fisher and chief economist Spencer Dale have both said recently that they are concerned about higher than expected inflation. © Guardian News & Media Limited 2010

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