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Is the UK in recovery? Not if you look behind the topline figures

by Frances Coppola     August 7, 2013 at 9:10 am

The ONS has some good news about UK industrial production.

Here are the summary points from its statement:

  • Production output rose by 0.6% between Q1 2013 and Q2 2013. Manufacturing rose by 0.7% over the same period.
  • By far the largest contribution to the quarterly growth in production came from manufacturing, which increased by 0.7% following a decline of 0.2% in Q1 2013.
  • Looking at the broader picture, production output was 1.2% higher in June 2013 compared with June 2012, reflecting a 2.0% rise in manufacturing; 7.8% rise in water supply, sewerage & waste management; 4.4% fall in mining & quarrying; and 3.3% fall in electricity, gas steam & air conditioning.
  • Production rose by 1.1% between May 2013 and June 2013. Manufacturing rose by 1.9% with reported rises in all of its sectors. The highest contributor to the rise was the manufacturing of transport equipment, which rose by 5.3% and contributed 0.7 percentage points to the rise in manufacturing.
  • The preliminary estimate of GDP, published on 25 June 2013, contained a forecasted rise of 0.6% for production in Q2 2013. This release of data also estimates production rose by 0.6% between Q1 2013 and Q2 2013 and therefore has no impact on the previously published Q2 2013 GDP estimate.

Looks great, doesn’t it? I must admit, I was impressed


Fortunately someone was sharper than me:

It seems things aren’t quite as rosy as ONS implies. Production is actually significantly below where it was in the same quarter a year ago. The “good news” is only an improvement in one month’s figures.

But in fact it’s much worse than that. This chart from the ONS’s release shows how far UK industrial production has fallen since the financial crisis

(larger version here):

What appals me about this chart is not the collapse of production in 2007/8, awful though is, but the fall in production since 2010. Even with the upturn, total production is now below the level that it was in the 2009 recession, and manufacturing has also fallen significantly since 2011.

There must have been some kind of serious negative shock to production in 2010/11 to cause such significant falls.

I have previously argued that double-digit inflation in domestic and industrial energy prices delivered a significant supply-side shock to the economy in the last quarter of 2010 and thereafter. I suggest that this chart supports my case, although others have alternative explanations.

However, whatever the cause of the evident shock to production in 2010/11, the fact remains that UK production is way below even its 2010 level, let alone its level prior to the financial crisis. The slight upturn this month, while encouraging, is certainly not the “UK recovery” that is being trumpeted.

There must be a much more substantial and sustained rise in both manufacturing and production indices before we can really claim that that the UK economy is on the mend. There is still an awfully long way to go.

Why southern Europe has a bleak future: the youth are emigrating

by Frances Coppola     June 7, 2013 at 2:42 pm

I wrote a post the other day that caused something of a stir. I argued that migration of the young & skilled from southern European countries could mean that those left behind face a very bleak future. Let me explain a bit further.

I am emphatically NOT arguing that there is anything intrinsically wrong with young, skilled people leaving in search of a better life elsewhere. Migration benefits both the migrants and the receiving countries. Immigration is a GOOD thing for countries that have ageing populations and skills shortages – as most Western countries do.

But where people can freely move to other countries, the sort of ‘internal devaluation’ that forces down wages in search of ‘competitiveness’ inevitably causes migration when the same jobs in Greece and Germany pay vastly different wages. Unfortunately it is this sort of ‘internal devaluation’ that has been forced on the Eurozone periphery because their membership of the Euro prevents them from devaluing their currencies vis-a-vis their main trading partners, which is the usual means by which countries restore competitiveness.

Traditionally, young migrants send money back to their parents. But in the West, with pension and healthcare systems that support the old, the explicit contract between children and parents is weakened. I don’t have evidence to support this but I think that young migrants are much more likely to send money home when there is little state pension or healthcare provision in their country of origin. If they believe that the state will support their parents, they may not send money home.

The problem is that the people left behind are older, less able and lower skilled, which makes these countries less attractive to businesses. After all, why would a business choose to locate itself somewhere where the local workforce is ageing and poorly skilled? So businesses would go elsewhere too. That would cause GDP to shrink further.

The population’s need for state support would actually increase as it ages and gets sicker, but tax revenue would fall as working people and businesses leave. That adds up to long-term decline and a growing burden on the state’s finances.

And old people and long-term disabled don’t generally pay taxes. So where will the taxes come from to support the welfare systems that these people depend on?

There is one final ingredient in this poisonous mixture. Most of these states are already highly indebted. With a growing burden on their healthcare and pension systems and falling tax take due to GDP decline, their debts can only get worse. The fiscal compact gives primacy to debt service over maintaining public services. As I see it, therefore, these states will eventually be forced to dismantle their welfare systems – the pensions and healthcare required by their ageing populations – to avoid debt default.

Eventually, I suppose, the old and the unskilled will also leave – if they can, and if any country will receive them. For although the European Union is in theory committed to the free movement of people, I wonder how real that commitment would turn out to be in the face of large-scale migration of pensioners and benefit claimants from the Eurozone periphery. I suspect that free movement of people might turn out to be another of those European laws that are binding in good times but illusory in bad.

Therefore as Krugman said, the combination of labour mobility with internal devaluation and lack of fiscal union in the Eurozone is potentially lethal.

There is no possibility of recovery for countries caught in the deadly embrace of high public debt and youth migration. For them, “internal devaluation” actually means creeping desertification.

A longer version of this blogpost is here.

The Great Banking Shoebox Swindle

by Frances Coppola     July 19, 2012 at 10:50 am

It’s morning in the charming little village of Britham. A man – let’s call him John – goes into his local bank.

“I want to borrow £1000”, he says.

“Let’s see what we can do”, says the bank manager.

After close inspection of John’s payslips and a few phone calls to local shops and tradesmen to check that John has always paid his bills and paid for his goods, the bank manager agrees to give him the loan.
continue reading… »

According to Barclays, who is actually to blame for this mess?

by Frances Coppola     July 4, 2012 at 1:16 pm

Following Bob Diamond’s resignation yesterday morning – forced, according to the BBC, by an unholy alliance of the Bank of England’s Mervyn King and the FSA’s Lord Turner – Barclays is fighting back.

It produced this statement in advance of Diamond’s meeting with the Treasury Select Committee today.

The impression given by this statement is that Barclays feels it has been hung out to dry for manipulating a rate when they believed they were doing so under instruction from the Bank of England.
continue reading… »

The Caja problem: why Spain is in deep trouble

by Frances Coppola     June 22, 2012 at 10:53 am

Ever since the financial crisis of 2008, there have been cries for large banks to be broken up. The idea is that no bank should be so large that it cannot be allowed to fail because if it did it would pose a threat to the domestic or international financial system.

So far no banks have actually been broken up, apart from some that failed in 2008 – Lehman and ABN AMRO, for example. But governments and regulators around the world have been looking at ways of limiting bank size and trying to ensure failed banks can be resolved quickly and safely.

Except in Spain.
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Europe’s real bailout: most of the money is still going to banks

by Frances Coppola     June 16, 2012 at 4:51 pm

According to James Mackintosh of the Financial Times, JP Morgan produced some figures today that showed where the money provided to Greece in its much-publicised bailouts actually went. Here’s what James said on twitter:

JP Morgan estimates only €15bn of €410bn total “aid” to Greece went into economy – rest to creditors. No wonder they are cross

No wonder indeed. The price they paid for those bailouts has been severe cuts in public spending and five years of deep recession. Their adult unemployment is now about 20% and their youth unemployment over 50%. And there is no relief in sight, only further cuts and deeper recession. The Greek economy is collapsing.
No prizes for guessing who the main creditors are, either. Banks, of course.
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Five charts that tell the European disaster story

by Frances Coppola     May 28, 2012 at 9:50 am

As you all know by now, I like charts. They tell stories.

1) Here’s a pretty chart from Europe. It tells us that unemployment in Europe was falling, generally, until 2008.

Since then it has risen sharply and continues to rise in all these countries except Germany.
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Forget what Cameron did, the Euro summit was a disaster anyway

by Frances Coppola     December 13, 2011 at 10:30 am

The European press have almost universally consigned the UK to the outer darkness, and the UK press have generally been pretty critical of Cameron, although some right-wing writers have been more positive.

Reuters concluded that Cameron’s action would be disastrous for the UK, which would end up being isolated. But Felix Salmon, also at Reuters, took a completely different view. And for me, Salmon gets it right.

You see, Cameron’s actions were completely irrelevant.
continue reading… »

The cold, hard truth: the Euro is finished

by Frances Coppola     October 25, 2011 at 9:05 am

On Friday 21st October 2011, a group of economists working for the so-called Troika produced a devastating report, leaked to the FT and the BBC. Then the Telegraph released the full text of the report.

European politicians have been fighting ever since. Germany’s Merkel and France’s Sarkozy had an argument loud enough to be heard in the EU concert hall.

The Belgian finance minister left early and refused to attend the press conference. Merkel and Sarkozy jointly turned on Italy’s Berlusconi, and Sarkozy slapped down Cameron. Entertaining though the politicians’ antics are, they arise from a terrible truth.
continue reading… »

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