Thursday, January 20, 2011

More upward pressure on interest rates

Record manufacturing data lifts UK recovery hopes

Howard Archer, chief UK economist at IHS Global Insight, said: "This is a fantastic report... Encouragingly, the more-forward looking elements of the survey were robust". James Knightley, at ING Financial Markets, said the price rises "point to a growing risk of interest rate hikes in the UK".

Posted by flashman @ 10:07 AM (1651 views)
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19 thoughts on “More upward pressure on interest rates

  • mark wadsworth says:

    “record manufacturing”???

    Are we going back to the good old days of vinyl?

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  • sibley's b'stard child says:

    Welcome back Flash; I knew it would only be a matter of time before you missed the cut-and-thrust…

    On the other hand, I couldn’t possibly comment on the article as its upbeat message runs contrary to my inherently pessimistic nature.

    That is all.

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  • I’m glad the manufacturing sector is doing well but according to the Office of National Statistics, manufacturing output is still 8 per cent lower than it was in 2006. (see http://www.statistics.gov.uk/cci/nugget.asp?id=198). I assume this growth figure is affected by the £/Euro exchange rate which has been a bit up and down over the last couple of years.

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  • I think it might be growth as in “value” growth. i.e. they have put their prices up. i.e. inflation. i.e. the thing that will cause interest rates to go up, rather than the thing that has changed because of some expectation of higher interest rates. i.e. the thing that is caused by interest rates not already being high enough.

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  • Morning Flashman

    I think this article is a couple of weeks old judging by the dates in the comments.

    In my tiny worls I had sensed a pick, but talking to a few people in the last week or so I’m not so sure. There’s certainly alot of redundancies in the air and our local county council has just announced 1200 more, which will no doubt lead to at least another 1200 outside of the county council from suppliers etc.

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  • “export growth offsetting a slump in demand from consumer and government spending as the austerity measures kick in”. So no slump in consumer demand and government spending in our trading partners then? If the UK has such a slump and they haven’t, where does the UK stand relative to them?

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  • The UK’s manufacturing sector is capital intensive (i.e. lots of expensive robots) but it doesn’t employ many people. So all this growth in manufacturing won’t offer much help for unemployment, which is a growing problem. Unemployed people don’t buy houses. HPC.

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  • What Drewster says. And when we want to manufacture something that requires lots of labour we get China to do it because its cheaper, so they get all the jobs and HP inflation.

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  • Jolly good news.

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  • And what use will the redundant public sector workers be to private sector manufacturing?

    Little call up for those who spend most of the day pontificating on HPC blogs and the like.

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  • Hello str: My intention was to point out another factor that is putting upward pressure on interest rates (rather than dwelling on the growth/employment aspect). However as you are talking about unemployment, I will contribute a couple of comments. It is not unusual for unemployment to carry on increasing while an economy is growing after a recession. A 2 to 3-year lag is not uncommon. Despite the comments about expensive robots and exporting manufacturing jobs, employment in the manufacturing sector has actually picked up a little bit. I doubt that the manufacturing sector will come close to replacing the expected loss in public sector jobs, so it’s not unreasonable to expect unemployment to carry on increasing for a while. On the other hand, the big recruitment agencies are quite bullish at the moment, so as usual the employment picture is quite opaque.

    Hi icarus: We can always look at things from different angles but an increase in exports is always better than a decrease. The aggregate world economy is growing and the Pound is down from peak, so it’s not that surprising that we are finding more export customers. Any move toward rebalancing is welcome

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  • general congreve says:

    @11 – Hi Flash, welcome back. As you say, a rise in exports is always better than a decrease, however, the last month for which figures are available, November, showed our monthly trade deficit to be the worst on record. So despite exports going up, when exports and imports are netted off, we are heading backwards!

    Of course there is also the other factor that if a UK manufacturer can get more for his product by selling it abroad (due to a weak pound) he will put up his prices in the UK to the level he would get abroad, otherwise he is throwing money away. So a booming export sector, if it is booming on the back of a weak pound, is inflationary for the UK consumer on the UK manufactured goods front and the import front.

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  • hi Flash, yes, export growth is just a reflection of the huge drop in sterling since ’07. Problem is, as GC says, that this works both ways. From ONS:

    “The deficit on trade in goods increased to £8.7 billion in November, compared with a deficit of £8.6 billion in October (originally published as a deficit of £8.5 billion). Exports rose by £0.9 billion and imports rose by £1.1 billion”.

    While it may not be unusual for employment to lag behind recovery it is unusual for recovery after a major recession to be so anemic. And that growth in emerging economies is led by China, which is characterised by massive credit that generates asset bubbles and low-employment, unnecessary infrastructure (won’t pay back the investment) carried out by public authorities run by self-serving political families which squeeze out the private sector and push back the day when the Chinese consumer will drive anything. We could well see a rise in inflation there and a tough clampdown later.

    We’ll have to see what 2011 brings but there are many landmines around (Spain – too big to fail, too big to bail, downward pressure on the US housing market, credit tightness, budget deficits and high unemployment/weak job creation there, increases in oil/energy/commodity costs for net commodity importing countries, currency tensions etc.) One could paint a rosier picture too but it’s clear that we aren’t out of the woods yet.

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  • Hello GC. You have a tendency to work out the future using virtual flow diagrams with all the branches missing. Everything neatly flows in a straight line to your desired outcome. At each stage in your prognosis there are so many possibilities and tangents (branches) that are ignored and so much information missed, that I hardly know where to start with it.

    “So despite exports going up, when exports and imports are netted off, we are heading backwards!”

    It isn’t remotely that simple. Here is a very basic way of working out the size of an economy

    Y = C + I + E + G

    E is the trade aspect, which is only a small percentage of Y (the sum of an economy). I’m sure you can look up what the other symbols are. Do you now see why your comment above is incomplete and inadequate to the task? Economics is a complicated subject that defies overly simplistic analysis of incomplete data sets. I’m reminded of that old saying: “You don’t know enough to know how little you know”.

    “Of course there is also the other factor that if a UK manufacturer can get more for his product by selling it abroad (due to a weak pound) he will put up his prices in the UK to the level he would get abroad, otherwise he is throwing money away. So a booming export sector, if it is booming on the back of a weak pound, is inflationary for the UK consumer on the UK manufactured goods front and the import front.”

    This is wrong. You are making the incorrect assumption that a manufacturer can always sell more than he produces and so he will only sell at the price paid by his most profitable customer. This is rarely the case. Production can usually be ramped up to fulfil all or most orders and as long as a manufacturer can turn a profit, he will charge a price that is tailored to optimise each market. Manufacturers do not need to make prices uniform across all markets. A good example is the car market from a few years back. Brits used to import cars from Scandinavian countries at discounts of up to 40% on UK prices. This was possible because the new car taxes imposed by Scandinavian governments were so high that the manufacturers decided to substantially cut their prices to those markets to optimise sales. The car manufacturers still made a profit on Scandinavian sales but they were smaller profits. When Brits exported cars from these markets, they did not have to pay the local Scandinavian taxes, so they got the cars very cheaply. Grey importing is extremely prevalent in today’s globalised economy and its existence further demonstrates the inaccuracy of your assumption (vis a vis your notion that a booming export sector is inflationary for domestic customers). It can sometimes actually be the other way around. A booming export sector allows the manufacturers to better amortise their origination and development costs which will often bring down the cost of the finished goods to all markets. Locally produced goods that are sold domestically also have less shipping costs attached which also makes it theoretically possible for them to be cheaper. It’s not always the case but the possibility is there.

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  • icarus: Our export growth is not ‘just’ a reflection of a drop in Sterling. It is also a reflection of a growing world economy. It is often assumed that a weak currency is good for exports and vice versa but it is not always that simple. The German manufacturing and export boom of the 60s 70s and 80s coexisted with a very highly valued DM currency. This was possible because they balanced their costs by using their highly valued currency to import raw materials cheaply. We are balancing our manufacturing costs the other way around (a cheaper currency helping our finished good prices but harming our raw materials costs). Ergo when exports pick up we have to put it down to more than relative currency values

    When a trade deficit increases, despite an increase in exports, it can actually be legitimately taken as a sign of increasing optimism and economic vigour (our finished goods importers are not just increasing their buying on spec and our manufacturers have contributed to the trade deficit by ramping up their purchases of raw materials in anticipation of larger export orders).

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  • flash – UK export growth is led by the car industry, which saw a precipitous decline in both production and exports in 2009. From the extremely low 2009 base we’re merely half way back to 2008 levels. One of the reasons for thinking we’re not yet out of the woods.

    True, the Germans were not too worried about a high DM, what they feared was wild swings in its value. One line of thought says they resisted the DM’s becoming an international reserve currency in the ’60s and ’70s because this would cause such swings (since its value would be determined by the world demand for DM assets, a factor over which the Germans would have relatively little control). When the DM became more of a reserve currency in the ’80s and ’90s the Germans were uncomfortable with the exchange gyrations, especially with respect to the US dollar. The dollar’s reserve status enables the US to borrow on the cheap (good for US consumption and corporations) but at the cost of diminished control over its exchange rate (bad for US jobs).

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  • icarus: Yes, exchange rate fluctuations make business difficult. That’s why currency hedging is such big business. It is not the currency fluctuations in themselves that bothered the Germans, so much as the forecasting, budgeting and re pricing problems that can interrupt a product before it has completed its journey from factory to end user.

    The total car world car market is larger than ever and forecast to get much bigger, which bodes well for future growth as long as we can keep a share of it. Our premium car products are flying out of showrooms in Asia and the Middle East. General Motors are emblematic of the upturn in the fortunes of Western car manufacturers. They have risen for the dead and are doing really well in places like China where they haven’t even scratched the surface.

    Things are going great, and they’re only getting better
    I’m doing all right, getting good grades
    The future’s so bright, I gotta wear shades

    Couldn’t resist that. Cheers icarus. It’s been a pleasure, as always

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  • flashy – has world passenger car production recovered to the 2007 level of 55m (or 73m motor vehicles)? Not so sure. And most of any recent increase is down to China, which leads the way in both production and consumption of new cars, the latter thanks to credit and falling prices (and of course low ownership per head). Greater car sales are also due to poor urban transport systems and are not my idea of an indicator of prosperity. It’s also questionable how solidly based the capitalist recovery is when it depends on exports to communist China, which IMHO does not yet have the basis for consumer-led growth. A question for another time, perhaps. Pleasure’s mine, cheers flash.

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  • icarus: I checked some data for you. Most estimates say that Japan still makes the most cars (only just and not for much longer) but China makes the most commercial vehicles. 2011 world sales are projected to exceed the 54.9m of 2007 with approximately 56.4m. Germany actually runs them surprisingly close in terms of sales value. Even at the low point of 2009, total world production only lost 3m from peak. The peak year of 2007 saw a record leap of 5m from 2006. The recessionary low point of 2009 actually saw 2 million more cars produced than in the year before the peak (2006). The year of the financial crisis (2008) produced the second highest ever production figures at the time. 2012 production is forecast to start making the production curve go ‘exponential’. When looked at dispassionately, it looks like there was no serious recession (in world car production terms). The China thing needs a full head of steam, so perhaps another time.

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