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UK GDP falls faster than expected

July 25th, 2009 | No Comments

• GDP down 0.8% in threee months to June
• City had expected a 0.3% decline, with some expecting growth

The chancellor’s forecasts for economic growth were blown out of the water official figures revealed Britain’s economy contracted by a record 5.6% over the last year as output fell for a fifth straight quarter.

Dashing hopes that the steepest decline in growth since the 1930s might be nearing an end, the Office for National Statistics said gross domestic product – the total value of goods and services in the economy – fell by 0.8% in the three months to June. The size of the drop surprised the City, which had expected only a 0.3% decline following recent signs of a pickup in the housing market and strong growth in high street spending.

But although the news caused the pound to fall 0.5% against the dollar to $1.64, the FTSE 100 saw its 10th straight day of gains, ending up 16.8 points, or 0.4%, at 4,577.

Economists believe GDP will almost certainly contract by more than the Treasury’s forecast of between –3.25% and –3.75% this year.

“It would be a miracle [if the government's target was met],” said Colin Ellis, European economist at Daiwa Securities SMBC. “Not on the scale of water into wine but not far off.”

The economy has already contracted by 3.16% this year and analysts are predicting a drop of 4.5% for 2009 as a whole.

Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said the economy would have to grow by 1% in the third quarter of the year and by 1.8% in the final three months to meet the government’s target of –3.75%.

The Liberal Democrat Treasury spokesman, Vince Cable, said: “These figures blow a hole in the chancellor’s GDP forecast for this year. The government’s failure to address the crisis in bank lending is only making the economic outlook worse. As a result, the deficit will balloon further, leading to bigger spending cuts or higher taxes.” The shadow chancellor, George Osborne, said: “These disappointing figures are much worse than expected and show that the recession is longer and deeper than the government had led us to believe. The sad news is this will mean the rise in unemployment is likely to be even steeper.”

Before yesterday’s data, some economists had even predicted the UK could post its first positive growth since early 2008, and the size of the decline prompted immediate speculation that the Bank of England would be forced into fresh emergency action to kickstart activity.

While the pace of decline in GDP slowed from the 2.4% seen in the first three months of 2009, the economy has suffered a cumulative contraction of 5.7% in the last five quarters.

The ONS said this was double the drop in the recession of the early 1990s and almost as big as the 6.4% retrenchment during the 1980-81 slump. The 5.6% drop in GDP in a year has not been matched since comparable records began in 1955.

Business services and finances, a sector that has boomed for much of the last decade, accounted for more than a quarter of the GDP decline in the second quarter. Overall, services fell by 0.6% on the quarter and by 3.8% on the year.

Describing the figures as “shockingly bad” Vicky Redwood, UK economist at Capital Economics, said they “firmly dash any hopes that the UK had already pulled out of recession”. Getting the economy back on track “looks likely to be a long hard slog”, she said.

The TUC’s general secretary, Brendan Barber, said: “There are no green shoots here. Unemployment is growing and a recovery that brings hope to the jobless looks ever more distant.

“Immediate big spending cuts are the last thing we need. They could tip the economy into an ever deeper downturn and make the deficit worse when the tax take falls and spending on unemployment goes up.”

Meanwhile, US consumer confidence fell this month to its lowest level since April amid growing pessimism about the long-term economic outlook, especially about income and jobs.

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Retail sales rise sparks recovery hope

July 23rd, 2009 | No Comments

The retail sales figures are likely to fan speculation that the economy will start to grow again in the third quarter

Britain’s economic recovery prospects were given a boost today on news that spending in the high street rose sharply last month.

June’s fine weather and early summer sales led to a rush for the shops and the volume of sales was 1.2% higher than in May, according to the latest data from the Office for National Statistics.

June’s jump in spending in shops and stores was three times the 0.4% increase expected by the City and more than reversed May’s 0.9% drop.

Retail sales account for around one third of consumer spending and have held up reasonably well in the face of the economy’s descent into recession over the past year. Sales were 2.9% higher last month than they were in June 2008, despite rising unemployment and weak growth in earnings.

Broader measures of consumer spending – including sales of cars and spending on restaurant meals – have been less buoyant, but today’s figures are likely to fan speculation that the economy will start to grow again in the third quarter.

A breakdown of the ONS figures showed that the good weather encouraged spending on summer clothes, footwear, outdoor leisure goods and food.

Price cuts also helped to woo consumers into the shops. The retail sales deflator – a measure of inflation on the high street – showed an annual fall of 0.2% last month against a rise of 0.7% in May.

In the past, July has been the peak month for summer bargains, but the fall in the deflator suggests retailers brought forward sales this year.

Kitchens, bathrooms and bedrooms

The official data reflects recent upbeat noises from Britain’s big retailers, who have seen shoppers shrug off the recession and splash out on summer clothes in the recent heatwave.

DIY sales have also held up better than expected. B&Q owner Kingfisher today posted forecast-beating figures, highlighting strong UK trading in kitchens, bathrooms and bedrooms.

“We have continued to perform well in a tough environment, profitably growing market share [and] strengthening our leadership position in Europe,” said the chief executive, Ian Cheshire.

B&Q like-for-like sales grew 0.7% in the 10 weeks to 11 July.

Earlier this week Next and Morrison’s cheered the market with announcements that they are on course to turn in better than expected profits this year.

Morrisons, the UK’s fourth biggest supermarket chain, and Next, the second biggest fashion chain, expect to rake in a combined £100m more than City analysts had forecast.

But economists cautioned that consumer spending would remain on shaky ground for some time to come.

“Sharply reduced mortgage payments and moderating inflation are boosting many people’s purchasing power, thereby making them more able and willing to step up their discretionary spending when circumstances are particularly attractive, such as when the weather is hot or when there is increased discounting,” said Howard Archer, economist at Global Insight. “Nevertheless, consumers remain under serious pressure from sharply higher and rising unemployment, markedly reduced earnings growth and heightened debt levels.”

“On balance, we suspect that consumer spending will be largely muted over the coming months, thereby limiting recovery prospects, especially as unemployment is likely to rise markedly further and earnings growth is continuing to moderate.”

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Brown ends term with some hope

July 22nd, 2009 | No Comments

Fiscal policy defended as new figures suggest government has actually prevented large rises in unemployment

Gordon Brown departed for his summer holiday today predicting that Britain may be able to avoid the large rises in unemployment that are likely to take place elsewhere in the world and has already prevented 500,000 people joining the dole queues.

Speaking at his closing press conference of the political season, the prime minister suggested that the government’s interventions on fiscal policy had helped slow the pace of rising unemployment.

No 10 is understood to be looking internally at charts suggesting that the Job Seeker’s Allowance count could hit a peak 500,000 lower than the Treasury had previously thought, saving as much as £2bn in benefit costs.

In the budget, the Treasury used an average of city forecasters to predict the unemployment claimant count would “rise from … 1.39m to 2.09m at the end of 2009, and to 2.44m at the end of 2010″.

Although economic growth is thought to have been worse than the Treasury predicted in the spring, the latest figures from the Office of National Statistics show the claimant count in June had risen to 1.56m, an increase of only 23,000 on the previous month, compared to monthly increases of 80,00 per month at the start of the year.

At his Downing Street press conference, Brown insisted he was not making predictions about unemployment, but noted that even last month 300,000 people had left the claimant register suggesting it was still possible to find work.

He added: “I think as people look at the situation in the next few months they will find unemployment rising very fast in other countries. The question is whether we can prevent unemployment rising as fast. If we had not acted, and taken the fiscal policy decisions we have, unemployment would be higher.”

Experts are so puzzled by the low claimant count, and its divergence from the Labour Force Survey figures showing unemployment at the much higher figure of 2.38m, that they have called for the Department for Work and Pensions to conduct a brief inquiry.

John Philpott, chief economist at the Chartered Institute for Personnel Development, said the size of the gap between the two figures of 800,000 warranted an explanation.

He said: “It could be that the government’s employment measures are having an effect or that the middle class do not want the hassle of signing on, or the poor think the regime is too tough, or that migrants are not allowed to claim. We do not know. The levels of inflow are going down and the levels of outflow are going up. Yet redundancies are at 300,000 a month, and there are vacancies of 250,000 – that would suggest the claimant count would be higher.

“If you had asked me three months ago I would have thought the claimant count would rising now by 100,000 a month, but it is now just as likely we will see the numbers rise slowly.”

Brown was careful not to say that the recession was coming to an end, and repeatedly said he was not going to be complacent. But ministers are desperately hoping that the figures are revealing the economy as stronger than expected.

Normally, unemployment is a lagging indicator, suggesting the unemployment rate could be close to 3m at the time of the general election next spring. But there is uncertainty inside Downing Street. Brown insisted: “If we had not intervened and acted decisively at least further 500,000 jobs would have been lost in this recession.”

He also argued the political debate should be turning on “the here and now question” of whether the government had been right to take the fiscal action it had, rather than debating how much spending will have to be reined in after the election.

He insisted his was the first government to introduce a debt reduction programme, pointing to the budget’s plan to raise taxes for high earners and to find £30bn in efficiency savings.

Without citing a source, he said: “Because of the action we have already taken our debt in most of the years ahead will be less than the debt of America, France, Germany and indeed lower than many other countries.”

Brown remains reluctant to set out the measures his government is willing to take after 2010-11, the last year for which there are departmental spending totals. He also challenged polls showing that the electorate wanted to see big public spending cuts, saying if people were asked whether they wanted to protect frontline services, such as health, schools and police, they would say they did.

But Brown is under political and expert pressure to say more about how he will reduce debts. He is likely to set out some of his plans in the autumn, by which time he hopes the country will be clearly coming out of recession.

He said he understood people had not yet seen the results of the government’s actions, and insisted by the time of the election the country will be making a choice, rather than as at present holding a referendum on Labour.

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Brown ends term with some hope

July 22nd, 2009 | No Comments

Fiscal policy defended as new figures suggest government has actually prevented large rises in unemployment

Gordon Brown departed for his summer holiday today predicting that Britain may be able to avoid the large rises in unemployment that are likely to take place elsewhere in the world and has already prevented 500,000 people joining the dole queues.

Speaking at his closing press conference of the political season, the prime minister suggested that the government’s interventions on fiscal policy had helped slow the pace of rising unemployment.

No 10 is understood to be looking internally at charts suggesting that the Job Seeker’s Allowance count could hit a peak 500,000 lower than the Treasury had previously thought, saving as much as £2bn in benefit costs.

In the budget, the Treasury used an average of city forecasters to predict the unemployment claimant count would “rise from … 1.39m to 2.09m at the end of 2009, and to 2.44m at the end of 2010″.

Although economic growth is thought to have been worse than the Treasury predicted in the spring, the latest figures from the Office of National Statistics show the claimant count in June had risen to 1.56m, an increase of only 23,000 on the previous month, compared to monthly increases of 80,00 per month at the start of the year.

At his Downing Street press conference, Brown insisted he was not making predictions about unemployment, but noted that even last month 300,000 people had left the claimant register suggesting it was still possible to find work.

He added: “I think as people look at the situation in the next few months they will find unemployment rising very fast in other countries. The question is whether we can prevent unemployment rising as fast. If we had not acted, and taken the fiscal policy decisions we have, unemployment would be higher.”

Experts are so puzzled by the low claimant count, and its divergence from the Labour Force Survey figures showing unemployment at the much higher figure of 2.38m, that they have called for the Department for Work and Pensions to conduct a brief inquiry.

John Philpott, chief economist at the Chartered Institute for Personnel Development, said the size of the gap between the two figures of 800,000 warranted an explanation.

He said: “It could be that the government’s employment measures are having an effect or that the middle class do not want the hassle of signing on, or the poor think the regime is too tough, or that migrants are not allowed to claim. We do not know. The levels of inflow are going down and the levels of outflow are going up. Yet redundancies are at 300,000 a month, and there are vacancies of 250,000 – that would suggest the claimant count would be higher.

“If you had asked me three months ago I would have thought the claimant count would rising now by 100,000 a month, but it is now just as likely we will see the numbers rise slowly.”

Brown was careful not to say that the recession was coming to an end, and repeatedly said he was not going to be complacent. But ministers are desperately hoping that the figures are revealing the economy as stronger than expected.

Normally, unemployment is a lagging indicator, suggesting the unemployment rate could be close to 3m at the time of the general election next spring. But there is uncertainty inside Downing Street. Brown insisted: “If we had not intervened and acted decisively at least further 500,000 jobs would have been lost in this recession.”

He also argued the political debate should be turning on “the here and now question” of whether the government had been right to take the fiscal action it had, rather than debating how much spending will have to be reined in after the election.

He insisted his was the first government to introduce a debt reduction programme, pointing to the budget’s plan to raise taxes for high earners and to find £30bn in efficiency savings.

Without citing a source, he said: “Because of the action we have already taken our debt in most of the years ahead will be less than the debt of America, France, Germany and indeed lower than many other countries.”

Brown remains reluctant to set out the measures his government is willing to take after 2010-11, the last year for which there are departmental spending totals. He also challenged polls showing that the electorate wanted to see big public spending cuts, saying if people were asked whether they wanted to protect frontline services, such as health, schools and police, they would say they did.

But Brown is under political and expert pressure to say more about how he will reduce debts. He is likely to set out some of his plans in the autumn, by which time he hopes the country will be clearly coming out of recession.

He said he understood people had not yet seen the results of the government’s actions, and insisted by the time of the election the country will be making a choice, rather than as at present holding a referendum on Labour.

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Industry faces long downturn – CBI

July 22nd, 2009 | No Comments

The World Trade Organisation also forecasts a sharp contraction in world trade this year and no return to sustained global growth until 2010

Britain’s leading employers’ organisation warned today that manufacturing faces a long, hard slog out of the steepest recession since the second world war.

Amid signs that factory output and order books are recovering only slowly from the shock to the economy caused by last autumn’s financial crisis, the CBI said a return to growth could “be some way off”.

The organisation’s caution on the economy came as a leading thinktank warned that the UK will not fully recover from the recession until 2014. The National Institute of Economic and Social Research (NIESR) also warned that house prices will keep falling for another three years.

In its quarterly health check of industry released today, the CBI found that 43% of firms reported a fall in output in the three months to July while only 12% said business had been brisker. The balance of minus 31 points represented a slower rate of decline than in April, when it stood at minus 53 points. Faced with a hostile domestic and overseas business climate, firms were slashing both jobs and investment plans, the survey said.

Ian McCafferty, CBI chief economist, said: “These figures reinforce our view that the road out of recession will be long and slow.”

With a report from the World Trade Organisation out today forecasting a sharp contraction in trade this year and no return to sustained global growth until next year, the CBI said the performance of British exports had been “disappointing”.

UK firms have been helped by a 20% fall in the value of the pound over the past two years, but this has been offset by the weakness of demand, especially in Europe, which accounts for half of Britain’s manufactured exports. A balance of minus 38 percentage points of firms reported that export orders were down over the last three months, little changed from the minus 39% in the previous quarter.

“The further sharp decline in export orders is of particular concern as we are not seeing much of a boost from the relative weakness of sterling,” McCafferty said. He added that although factories had run down their inventories of unsold goods, firms still planned another bout of aggressive de-stocking over the coming months.

On a more positive note, the employers’ organisation said business confidence was at its least negative since the early stages of the credit crunch in October 2007 while constraints on credit availability had eased back to the levels before the collapse of Lehman Brothers last September brought the global financial system to the brink of collapse.

Pascal Lamy, the director-general of the WTO, said today that in the past few months trade had “contracted more than at any time since the 1930s, reflecting the dramatic global economic downturn provoked in the first instance by the collapse of major financial institutions.

“Trade growth will be strongly negative this year and we are unlikely to see sustained economic growth until 2010.”

The WTO said that the weakness of the European economy would mean China overtaking Germany this year to become the world’s biggest exporter.

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Britain ‘will take until 2014 to recover’

July 22nd, 2009 | No Comments

• NIESR forecasts a further fall in house prices
• Cost of servicing national debt set to double

The UK economy will not fully recover from the recession until 2014, according to a top thinktank which also warned today that house prices will keep falling for another three years.

The National Institute of Economic and Social Research (NIESR) predicted that it will take another five years until income per head has returned to the level seen before the recession started in the second quarter of 2008. In a gloomy assessment of Britain’s economic prospects, it also warned that the cost of servicing the country’s soaring national debt will almost double within four years.

NIESR’s latest forecast is that the UK economy shrank by 0.4% between April and June, which would mean the recession would have lasted for five quarters. It believes the recovery will not begin until the last three months of 2009, and then only with anaemic growth of 0.5%.

“The recovery will be weak,” warned NIESR economist Simon Kirby yesterday. “We see continued contraction in consumer spending and business investment [in 2010].”

On house prices, NIESR does not share the recent optimism that the market might be bottoming out.

“There has been talk of stabilization and some recovery in the housing market, but we don’t think this is the case,” said Kirby. “We only see growth in the housing market returning in 2012.”

Faced with the worst economic downturn since the Great Depression, the UK government is planning to spend its way back to recovery. NIESR warned that the resulting public borrowing will put a heavy burden on the public finances, and called for aggressive cuts to public spending.

“The introduction of a more credible plan to return the public finances to a path of fiscal sustainability remains a necessity,” it said, in a clear warning to chancellor Alistair Darling – and his possible successor, George Osborne.

Even after assuming that public spending will indeed be slashed, NIESR has calculated that annual borrowing will still be over £120bn in 2014 – some £23bn more than Darling’s own estimate.

The government is expected to borrow £165.7bn this year to balance the books, with further massive borrowing already inked in for future years. Last month alone it borrowed £13bn to cope with a sharp fall in tax receipts.

According to NIESR’s forecasts, the cost of servicing this debt will swell from £25.6bn this fiscal year to £50.7bn in 2013/14.

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US economy improving – Bernanke

July 21st, 2009 | No Comments

Bernanke said the Federal Reserve had an array of weapons at its disposal to withdraw its unprecedented monetary stimulus when the time was right

The state of the US economy appears to be improving and the Federal Reserve is reviewing ways to withdraw its massive monetary policy stimulus when the time is right, Fed chairman Ben Bernanke said today.

Appearing before the House financial services committee for his report on monetary policy, Bernanke said: “The pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization.”

However, he cautioned that unemployment was likely to remain high into 2011, and said that this could damage already fragile consumer confidence and potentially undermine what is expected to be a very gradual recovery.

Bernanke said the Federal Reserve had an array of weapons at its disposal to withdraw its unprecedented monetary stimulus when the time was right, even if its balance sheet remained large for a time.

“We also believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation,” he said.

John Higgins, senior market economist at consultants Capital Economics, said: “The Fed is confident that it has ‘the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner’ and so ‘prevent the emergence of an inflation problem further down the road’. Presumably there is nothing that Bernanke could ever say to convince the more naive monetarists, gold bugs and conspiracy theorists that a surge in inflation is inevitable.

“But while we are not blind to the risk that the Fed could misjudge the timing (in either direction), in principle at least the exit strategy should be much more straightforward and less disruptive than many assume.”

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Forecasts boost Next and Morrisons

July 21st, 2009 | No Comments

• Morrisons to make extra £50m profit for first half of year
• Next says profits will be £30m higher than forecast

Supermarket group Morrisons and fashion retailer Next cheered the City this morning as they said profits for the last six months will be considerably higher than expected.

Both companies rushed out unscheduled trading updates today after calculating that, despite the recession, their earnings have beaten market forecasts.

Morrisons said it will make an extra £50m profit for the six months to the start of August. Its store modernisation plan is also expected to yield an extra £20m in savings, which should push pre-tax profits up from the previous forecast of £670m to around £740m.

This sent shares in the UK’s fourth largest supermarket chain soaring by 10% to 279p when trading began in London. Other retailers also rallied, with Marks & Spencer, Sainsbury’s and Tesco all among the biggest risers on the FTSE 100.

Nick Bubb, retail analyst at Pali International, said today’s trading updates were a welcome surprise.

“The green shoots are alive and well and it will take a hurricane in the autumn to blow them over,” Bubb said.

Morrisons said that the number of customers visiting its stores was continuing to rise. The average basket size has also increased, indicating that it continues to be one of the winners of the economic downturn.

“The strong start to the year has been maintained through the second quarter,” the company said. “An increasing number of customers are shopping with Morrisons attracted by the group’s fresh offering, keen positioning on price and promotions and its industry-leading service and availability.”

Bank of America analyst John Kershaw said Morrisons had “hit expectations for six”.

“We felt Morrisons was driving sales and margins but this profit performance is in a different orbit,” said Kershaw, who raised his target for its shares from 280p to 310p.

Kershaw added that Morrisons would have benefited from the sunny weather in May and June.

David Buik, City commentator at BGC Partners, said that today’s figures showed that Morrisons’ chief executive, Marc Bolland, was the right man to succeed Sir Stuart Rose at Marks & Spencer.

“Morrisons has never looked back [since Bolland took over] and is clearly snapping at the heels of Tesco, Asda and Sainsbury’s,” said Buik. “If there was any way that M&S could crowbar Marc Bolland out of his current employers, he would make a massive contribution to M&S rising like the phoenix from the ashes.”

Clearance sales start well

Next also said it was profiting from the warmer weather, as it told investors that it expected profits for the current financial year would be £30m higher than forecast.

Sales of summer clothing rose sharply and Next struck better deals than expected with suppliers. It began its end of season sale last weekend with less unsold stock than a year ago, which should mean less pressure to slash prices.

“The initial clearance rates have been encouraging,” said Next.

It had been due to release its first-half trading statement next week, but said today that like-for-like sales on the high street were down 1.9% – a smaller drop than expected. Sales through its catalogue business were up 1.1%.

Shares in Next slipped slightly today, down 0.6%, having risen by 20% in the last month.

The firm did caution that rising unemployment would have an impact on its performance in the next six months, and warned that swine flu could outweigh the benefits of good weather later this summer.

“Our forecasts do not account for any significant impact on sales from swine flu, and as yet we have observed no material effect. However, there is downside risk to our expectations if wider infection rates deter shoppers,” Next said.

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Government welcomes Nissan jobs

July 20th, 2009 | No Comments

Sunderland visit comes as government names north-east as Britain’s second low-carbon economic area

Carmaker Nissan has pledged to invest more than £200m in a new rechargeable battery factory in Sunderland boosting the north-east of England’s drive to become a leading centre for green technology.

The region hopes to swap a legacy of shipbuilding, steam engines and coalmining for a pioneering role in the manufacture of electric cars and lorries.

Nissan’s announcement of plans for a rechargeable lithium-ion battery plant was accompanied by Gordon Brown’s confirmation that the government is making the north-east the UK’s Low Carbon Economic Area specialising in “ultra-low carbon vehicles.”

Against a backdrop of job losses and unrelenting uncertainty for workers at UK car factories, the prime minister hailed Nissan’s new battery plant as a step towards economic recovery.

He sought to raise hopes the Japanese company could choose its north-east base for a new European green car operation over a rival facility in Spain.

“Nissan’s investment in a new battery plant and its hope to start producing electric vehicles here in Sunderland is great news for the local economy, creating up to 350 direct jobs and creating and safeguarding hundreds more in the associated supply chain,” said Brown.

“Sunderland could now be a strong contender to produce electric vehicles for Nissan in Europe, and we will continue to work with Nissan to ensure this happens.”

Visiting Nissan’s Sunderland plant, Business Secretary Peter Mandelson said the north-east was already a specialised region for green cars.

The region’s designation as a Low Carbon Economic Area will mean establishing a training centre to teach the manufacture and repair of green cars, creating a research and development hub which collates work from five universities on using low carbon cars and opening a test track to try out new vehicles.

The north-east is the second such “economic area” to be created by the government after the South West of England – a centre of marine and tidal energy schemes.

Mandelson hopes the north-east green cars project will attract foreign investment and secure the UK’s place as “a global leader in high-tech manufacturing and automotive industries.”

Local government officials hailed the Low Carbon initiative as potentially creating 10,000 jobs over five years – a huge morale boost to an area hit by the rapid decline of its manufacturing industry and wider economic turmoil.

Margaret Fay, chairman of the One North East regional development agency drew parallels with the north-east’s industrial heyday.

“The first steam engines came from the north-east, we are good at firsts. We were the centre of excellence all those years ago with Stephenson and the Rocket. It’s like history repeating itself for the next generation.”

“We see this as the next iteration of the north-east economy. We have been through the very heavy industries of shipbuilding, steel, coalmining etc… Clearly manufacturing is at the heart of what we have always done in the region and this takes us back into what really are our core competencies. But this is manufacturing for the future.”

The agency has aspirations to turn the north-east into Britain’s green car training centre as demand rises for mechanics able to fix a new breed of electric vehicles.

“The training centre will go right from basic training, through apprenticeships, right up to masters and PhD’s,” said Fay.

The planned research and development centre will look into aspects of electric cars such as how far they can travel between charges.

AA president Edmund King says his group will feed its research into both the training and research centres.

“It was important to get a motoring organisation involved because electric vehicles will only be successful if consumers use them, understand them and trust them,” said King.

He quotes AA research suggesting almost two-thirds of drivers would consider buying a more fuel efficient car. Drivers in the North East and Northern Ireland were most likely to consider buying a green car.

But others are more sceptical that electric cars are worthy of such “green” government investment. Stephen Glaister director of the RAC Foundation points out the power to charge batteries will most likely be generated from coal or gas. “I think it is entirely unclear whether electric cars have anything to offer.”

“This may be about being seen to do something, it may be about creating new jobs, but I imagine it’s very risky in terms of the particular technology they are going into. There’s a long history of governments supporting different bits of the motor industry and having them fail.”

North-eastern company Smith Electric Vehicles, the world’s largest manufacturer of electric commercial vehicles, has questions about the government’s green car plans for other reasons.

Managing director Geoff Allison was puzzled as to why the government was not looking at manufacturers’ more urgent needs.

“Here today, now, we need investment. We have got electric vehicles, we need volume orders, we need subsidies. We need incentive from the government to help us get commercial vehicles on the road quicker. “In Europe they are all way ahead of us in terms of acceptability of electric vehicles.”

If we aren’t given support, the French will overtake us. You won’t be buying a British built electric vehicle, you’ll be buying a French one,” he says


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Chinese spurt raises recovery hopes

July 16th, 2009 | No Comments

• Annual GDP in China reaches 7.9%
• ‘The recovery is not fully balanced’ warns government

China’s economic growth accelerated in the second quarter of this year as a massive stimulus package kicked in, lifting hopes that it could drive the rest of the world towards recovery.

Annual gross domestic product growth in the world’s third largest economy rose from 6.1% in the first quarter of the year to 7.9% – well above predictions – the National Bureau of Statistics reported today.

The latest rise indicated that the country was on course to achieve its growth target of 8% for the year, said Jing Ulrich, JP Morgan’s chairwoman for China equities.

“The recovery is confirmed. The bottom was the fourth quarter last year,” Hao Daming, a senior economist at Galaxy Securities in Beijing, told Reuters.

Many have hoped that China’s huge industrial expansion and growing middle class hungry for consumer goods and previously unattainable luxuries such as cars could help to lead the world into recovery.

But while officials heralded the good news, they cautioned that the basis of the rebound was not stable.

Predictions of China’s 2009 growth have wavered up and down, but the International Monetary Fund recently raised its forecast by one percentage point to 7.5% and the World Bank boosted its forecast to 7.2%.

Li Xiaochao, a spokesman for the statistics office, said the data had laid a foundation for hitting the 8% growth target, believed by many to be the level needed to hold unemployment down.

“Our economy is continuing to turn for the better and there are more and more positive factors,” Li told a news conference.

“We see more people shopping and prices beginning to rise. The economy is recovering and the recovery is intensifying. All the government’s policies have worked together to help us overcome the financial crisis,” he said.

But he warned: “The basis of the rebound of the people’s economy is not stable. The recovery is not fully balanced, so there are some regions that have not done as well as others.”

A breakdown of the 7.1% GDP growth rate for the first half of 2009 showed that investment accounded for 6.2 percentage points – reflecting the government’s infrastructure-driven 4 trillion yuan (£356bn) stimulus package. An increase in bank lending also helped the economy to pick up.

Consumption added 3.8 percentage points to GDP, but net exports, which have slumped this year, subtracted 2.9 points.

Factory output growth rose 10.7% in June, faster than May’s 8.9% growth, the bureau said.

“It’s clear to me that China is really successfully shifting from export-driven growth to domestic-driven growth. It’s very encouraging,” Tim Condon, head of Asia Research at ING in Singapore, told Reuters.

Analysts are warning that concerns about inflationary expectations could soon lead to a tightening of monetary policy.

“There are still quite a lot of uncertainties. We should remain watchful about changes in prices,” Li told reporters.

Brian Jackson, an economist at the Royal Bank of Canada in Hong Kong, told Reuters: “In the near term, we think the focus will remain on supporting growth, but there is an increasing chance that policy will need to be tightened sooner and more forcefully to deal with potential problems caused by very easy liquidity. The accelerator is clearly working well, but at some stage the brake will need to be used.”

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Rebalancing our shaky economy

July 15th, 2009 | No Comments

With unemployment rising and manufacturing declining, the economy needs more state help for a speedy recovery

Today’s unemployment figures show that, although banks’ share prices may be recovering, the labour market continues to deteriorate. Unemployment is set to continue to rise through the rest of the year and probably for the first half of next year too. The full human cost of the recession is still to be felt as the number of people out of work climbs towards 3 million.

The message coming out of the recession is clear: we need to build a broader-based economy, less reliant on consumer debt and more focused on investment and innovation. What is less clear is where the new jobs will come from. In the last economic cycle nearly three-quarters of all new jobs were created in the public sector, finance, construction and retail. Jobs will not be created in the same sectors in the next economic cycle. Other sectors will have to pick up the slack if we are to return to full employment.

While the need for the economy to rebalance is clear, the scale of the challenge that lies ahead is greater than people realise. After the last recession it took eight years to return to the previous level of peak employment – it could take even longer this time round. Employment in manufacturing – often presented as a potential source of jobs in the future recovery – has been falling at an annual rate of 3.7% over the last seven years, so just halting this decline would be a major change of trend.

The UK will therefore be reliant on a big turnaround in manufacturing and on services that aren’t in finance, retailing or the public sector for jobs growth in the next few years. The challenge of creating these jobs and achieving more balanced employment may be large, but it is not insurmountable. The UK has strengths on which to build – high-tech manufacturing, pharmaceuticals, services for export, business services, publishing, media and creative industries, for example. It could also stand to gain from increasing demand for green technologies as a result of attempts to address climate change and for care services as a result of our ageing population. The weaker pound, growing markets in emerging economies and concerted economic stimulus at home and abroad will all help.

But a rebalanced economy will not develop by chance. Some strategic government support for industry is also needed. As the financial crisis unfolded, Lord Mandelson trumpeted an “activist” approach to industry in an attempt to create an economy “with less financial engineering and more real engineering”. This was a move in the right direction but has not gone far enough.

We believe there is a more structural role for the state to correct market failures. The role government should play in the economy doesn’t stop when the recession is over. That is why we are calling for the government to match its rhetoric with the creation of institutions and policies that will “fix” an activist approach into the wider economy – including the creation of an infrastructure bank, government-backed university-business links, a national ideas bank and greater control for city-regions over their local economies.

A debate is beginning about how the UK economy will grow and what role the government should play in the process. The government should seize the opportunity to put in place the institutions and policies required to build a more sustainable employment base and ensure a speedy recovery to full employment. There are reasons to be optimistic and tell a positive story about the possibilities for growth and job creation in the UK – but that optimism depends on a supportive, strategic government.

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House prices ‘to stay in the doldrums’

July 14th, 2009 | No Comments

• Estate agent survey a false dawn says consultancy
• Buyers not confident enough to join market

Britain’s housing market will stay in the doldrums until the middle of the next decade, and there is a 30% chance that prices will take until 2020 to return to their peak before the crash, a consultancy firm predicts.

PricewaterhouseCoopers said recent signs of a recovery in the market which had been detected by a fresh survey of estate agents were a “false dawn”. John Hawksworth, the chief economist at PWC, said prices would experience a gentle decline for the next 18 months and then pick up slowly over the following years.

“Although the estimated average UK house price overvaluation of around 25% in mid-2007 has now been largely eliminated, our analysis suggests that house prices could still have further to fall over the next year.

“Despite some recent reports of rises, we are not out of the woods yet by any means. It is important for buyers to take a long-term rather than a short-term view.”

He added that house prices were likely to fall by a further 5-10%.

Hawksworth predicted a repetition of house price movements in the 1990s, when a collapse was followed by a long period of little change. “After a recession it takes time for people to get their confidence back and for memories to fade. Credit conditions will remain tight for some time and we expect unemployment to rise for the next year or so. There will be an environment of job insecurity where people are cautious about buying a house.”

PWC said it was more likely than not that real house prices in 2015 could still be below average levels seen in 2008, after adjusting for inflation. Even in 2020, after five years of relatively strong growth, the consultancy saw a 30% chance that real house prices could be below 2008 levels.

In its monthly property snapshot, the Royal Institution of Chartered Surveyors said price expectations rose for the first time in over two years in June due to a lack of homes on the market and an increase in buyer enquiries.

Jeremy Leaf, RICS spokesman, said: “Although the market is showing signs of improvement, it is unlikely that there will be a sustained upturn while mortgage lenders remain risk adverse. A lack of stock on the market is providing a platform for modest price increases. While supply remains tight, the market may continue to show tentative signs of firming but instructions are starting to increase in some regions and this could dampen any meaningful recovery as long as economic conditions remain quite so uncertain.”

Hawksworth said: “What would be a surprise would be if house prices now started to recover strongly in a sustained way. That would go against the lessons of history. There may be the odd month where the market seems to be going up but it is a false dawn because there is no underlying strength.”

He added: “The pace of recovery in house prices seems likely to be relatively modest until the middle of the next decade, although it could pick up again beyond that as supply shortages reassert themselves, credit conditions return to normal and negative memories of the current housing bust fade.”

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Economy shrinking at 50-year record

June 30th, 2009 | No Comments

Downward revisions to official statistics show output fell 2.4% in the first three months of the year and the recession started three months earlier than thought

The recession facing Britain is even deeper than had been thought and started more than a year ago, it was revealed today

National income fell in the first quarter of this year by 2.4%, the biggest drop since 1958, as the Office for National Statistics revised its initial estimate of 1.9%.

The figures are much worse than expected. Extended to the whole year, the drop in output in the January to March period is now equal to 4.9% – the worst since records began in 1948.

“We hope the recovery comes as soon as possible but sadly we now know this recession has been longer and deeper than we had thought,” said shadow chancellor George Osborne.

“This also means that in the future unemployment will be higher and Labour’s debt crisis will be even worse.”

Although GDP fell 2.4% in the third quarter of 1979 and first quarter of 1974, statisticians said these were rounded from 2.36% or 2.37%. The figure for this year was exactly 2.4%.

The revision is one of the biggest ever made by the ONS and it said the reasons were changes to its estimate of the construction and services sectors.

The ONS also revised down its figure for the second quarter of last year to -0.1% from zero, meaning the recession started earlier than previously thought. And the fourth quarter of 2008 figure was revised down to a fall of 1.8%.

“The recession, which now begins in the second quarter of 2008 rather than the third, is now thought to be quite a bit deeper than previously thought, and is looking ominously like the early 1980s vintage,” said Danny Gabay of Fathom Consulting.

Critics of the Bank of England who called for big interest rate cuts in the first half of last year, will feel justified by the data, since the Bank’s monetary policy committee argued into last autumn that there was little likelihood of a recession occurring and delayed rate cuts until October. In fact, the economy had entered one last spring.

Separately, the Trades Union Congress said that while there were signs of “green shoots” in the economy, this was more to do with an easing of the pace of the fall in output rather than that a big recovery was under way.

“This recession is already worse than the 1990s one and is likely to be worse than that of the 1980s,” said Richard Excel, TUC labour market expert. “It has been very severe and we are probably only half way through. It will be quite some time until employment and growth return to pre-recession levels.”

Paul Gregg, labour market expert from Bristol University, noted that unemployment had started rising earlier in this recession than in previous ones and was “encouraged” that monthly rises in the claimant count appeared to be slowing down.

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One small step forward

June 28th, 2009 | No Comments

An agreement by all 192 UN states on the financial crisis acknowledges our global interdependence

Last week, something unusual happened: the international community, coming together at the UN to discuss the global financial crisis and its impact on the developing world, reached a consensus on an agreement. This spelled out the issues to be addressed and laid out the way forward. Many had said it would be difficult for 192 countries to reach consensus, and that was why discussions should be limited to a self-selected group of 20. In fact, the UN agreement was stronger and more forceful than the G20 communique.

It also demonstrated why it was important to have an inclusive process: the G192 were willing to raise key issues that the internal politics of the G20 may have made too sensitive. For instance, while the G20 focused attention on the role of bank secrecy in tax evasion, the UN agreement highlights corruption.

The G20 recognised the need for a global response to the global downturn. But responses are framed at the national level, and often take insufficient account of the effect on others. As a result they have been too small and they are structured to maximise domestic impacts, not global ones. Moreover, developing countries do not have adequate resources for coping with the crisis. The G20 committed themselves to providing generous support, mostly through the IMF. But they did not take adequate note of the risk of poor countries undertaking more debt, and the reluctance of many to turn to the IMF for support – partly because of its history of demanding borrowers undertake counterproductive procyclical policies.

Participants at the UN conference emphasised the importance of more grant funding. The hundreds of billions (perhaps trillions) of dollars spent on bailing out the banks has put a new perspective on government expenditures. It makes claims that there are insufficient funds to finance development assistance ring hollow. But developing countries are constrained not just by a lack of money, but a lack of “policy space”. The meeting concluded that: “Countries must have the necessary flexibility to implement countercyclical measures and to pursue tailored and targeted responses to the crisis.”

One of the factors contributing to the crisis was longstanding global imbalances, and one of the sources of these was the dollar-based global reserve system. This contributes to an insufficiency of global aggregate demand, as countries divert purchasing power into precautionary savings – and such an insufficiency may impede the world’s ability to regain robust growth. While the UN meeting was not the occasion to devise a new system, it acknowledged calls for “further study of the feasibility and advisability of a more efficient reserve system”. Unsurprisingly, some countries with large dollar reserves were concerned about the current system, the low returns and high risk – increasing with America’s rising debt and the Federal Reserve’s ballooning balance sheet.

The UN meeting reinforced the need for reforms in the governance of the international economic institutions – some of which pushed policies of financial market and capital market liberalisation that were in part responsible for the crisis and its rapid spread. But it also delved into controversial issues of enormous importance to developing countries, such as migration.

The UN meeting reflected what is now a global consensus: “The current crisis has been compounded by an initial failure to appreciate the full scope of the risks accumulating in the financial markets and their potential to destabilise the international financial system and the global economy …” But discussion highlighted the shortfalls in the proposed regulatory reforms – for instance, the reluctance in some countries to do enough about the too-big-to-fail banks. While everyone talks about the need for transparency, some participants raised concern about changes in accounting in the US that have made matters worse.

Perhaps the most important conclusion was the most obvious: “The ongoing crisis has highlighted the extent to which our economies are integrated, the indivisibility of our collective well-being, and the unsustainability of a narrow focus on short-term gains.” We have allowed economic globalisation to outpace political globalisation – we do not have the institutions or the mindset to respond collectively in ways that advance the wellbeing of all. The UN meeting represented a small, but important, step forward.

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