There was a ready-made explanation when the March manufacturing figures were bad. Falling factory output was all down to the weather – the blizzards brought in by the “beast from the east”.
No such excuse is available this time. Manufacturing posted its biggest fall in production in more than five years. It was the third monthly decline running and nine of 13 industrial subsectors said they had cut output. The expected bounce-back in the construction sector was also a lot less vigorous than predicted, while order books for building firms look weak.
The manufacturing figures from the Office for National Statistics are troubling for three reasons. First, surveys had suggested a much better performance. Second, the 0.5% drop in production in the three months ending in April makes forecasts of a strong bounce-back from tepid growth in early 2018 look premature.
Third, even if signs are correct that consumer spending is picking up because of falling inflation, the UK will have reverted to its old pattern of growth after a short interlude in which activity was better balanced.
The travails of Britain’s manufacturing sector are part of a broader slowdown in industrial production since the end of 2017. Softer demand from other European countries and a stronger pound have been factors but UK firms have not exactly helped themselves by squandering the opportunity provided by the exchange rate depreciation that followed the EU referendum two years ago.
Given the choice between using a more competitive pound to sell more abroad or to boost their profit margins, companies chose the latter course. That helps explain why the improvement in Britain’s trade figures is a lot less impressive than it might have been and why productivity growth – which is easier to generate in manufacturing than in the services sector – has been so poor.
Manufacturing makes up 10% of the economy’s output and construction a further 6%, so it is a bit too early to rule out an increase in interest rates from the Bank of England at its August meeting. A lot will depend on news from services, which account for 80% of gross domestic product.
Even so, the dismal news from manufacturing and construction matters. The Bank’s optimism that a pick-up in growth in the second quarter will justify higher borrowing costs is based so far purely on survey evidence. This is the first hard data for the second quarter – and it is not good.
Why Draghi and ECB may be slow to let go of QE
It took the European Central Bank a long time to find the quantitative easing habit. While the US Federal Reserve and the Bank of England were printing electronic money like there was no tomorrow, the new form stimulus was all a bit too radical for the monetary conservatives at the ECB.
That, though, has all changed under the presidency of Mario Draghi, who finally overcame resistance to QE and announced a bond-buying programme in January 2015.
Although the eurozone has subsequently perked up, there are still some policymakers, the Bundesbank’s Jens Weidmann for one, who fear that too much QE will be inflationary. Weidmann is insisting that the ECB wind up its programme by the end of the year, and preliminary discussions will take place at the bank’s meeting in Latvia this Thursday.
A report by Arend Kapteyn, the chief economist at the UBS investment bank, shows just how crucial QE has been to the eurozone. The ECB’s headline deposit rate stands at -0.4% but once QE is taken into account the effective policy rate is -5%.
Eurozone growth since 2015 has average 2.2% but of that 0.75 points are the result of the ECB’s stimulus. Kapteyn estimates that the eurozone’s trend rate of growth – the non-inflationary pace at which it can expand once unused capacity is used up – is around 1% and not the 1.5% the ECB and the International Monetary Fund are forecasting.
That means the eurozone looks extremely vulnerable to the next global slowdown, whenever that occurs. It also suggests the ECB may be as slow to dispense with QE as it was to embrace it.
Markets’ reaction to testy G7 summit has history on its side
Financial markets couldn’t care less that the G7 in Canada ended in failure and history suggests investors are right to dismiss the photo ops as empty pageantry. It is almost 500 years since what is regarded as the first international summit resulted in Henry VIII and Francis I of France seeking to outshine each other at the Field of the Cloth of Gold. Nothing earth-shattering happened there, either.