Friday, November 10, 2017

The latest industrial production data show year-on-year growth of some 2.5%, with industrial output rising 1.4% over the most recent quarter and by 0.7% between August and September. Industrial production is now at its highest level since October 2008.

The upswing in industrial output over the last six months contrasts with the previous nine months, during which the series had been very static. The main driver is manufacturing - and specifically transport equipment and the 'other manaufacturing and repair' category. The benefit of recent investment in motor vehicle production facilities is being realised, though there must be some nervousness surrounding future developments in this sector given the potential imposition of tariffs in the event of a hard Brexit.

The recent upswing in the data result in a markedly revised forecast - though given present uncertainties, any forecast should treated with the utmost caution.

Tuesday, October 10, 2017

The latest data on industrial production show growth in the period to August of this year. This follows a spell of falling output during the first six months of the year; while industrial output has now recovered somewhat, it is still below the levels reached towards the end of last year in the immediate aftermath of the sterling depreciation. The trend in the series is somewhat bumpy, but appears still to indicate muted performance over the coming period.

The main source of uncertainty remains Brexit, and in particular the nature of any agreement that is reached between the UK and EU concerning future trade arrangements. The UK economy is not, however, entering the coming two year period in a particularly buoyant state. From this perspective alone, the goal of a transition period of 'around' two years in the Brexit arrangements seems propitious in that it kicks a rather unpleasant can down the road. Longer term, achieving a trade deal with the EU that is as close as possible to current arrangements seems expedient.

Friday, September 08, 2017

The industrial production data for July provide some encouraging signs. Year on year growth is almost 0.4% - well short of the 2% plus figures observed between November 2016 and February 2017, but positive nonetheless. The recent peak level of industrial output - in December of last year - was achieved following the depreciation of sterling in the wake of the Brexit referendum, and - as we head to the latter part of this year - it appears likely that, with that high as a baseline, year on year growth is likely to decline. Indeed, my neural network forecaster of this series continues to suggest negative growth over much of the coming period. Sterling's depreciation is likely to have a one-shot impact on the growth of exporting industries, and the benefit of that is unlikely to be prolonged far into the future.

Monday, August 21, 2017

The 'Economists for Free Trade' group has produced a document, authored by Patrick Minford, suggesting that Brexit will provide considerable economic benefits to the UK. It is interesting how this group has changed its name so that it looks as though more than one group is saying the same thing as them - they were 'Economists for Brexit' a few months ago.

Minford's basic argument for free trade is one that most economists would support. Trade (whether international or just me going to buy a coffee) happens because it's an exchange that makes both parties better off - and restricting that trade makes us worse off. International trade can be restricted by tariffs, but also by a whole plethora of non-tariff barriers (eg regulations of various kinds).

Minford emphasises tariff barriers - and (curiously, since he reckons Brexit will ‘mostly eliminate’ UK manufacturing) has a very manufacturing oriented view on this. But he's way out of date. The World Trade Organisation works to reduce tariff barriers worldwide - and we already benefit from that. There are still some tariffs, sure, but this really isn't the main thing that impedes trade.

That impediment comes from regulations - and the single market has done more than anything to remove it. Leaving the single market would put a whole lot of new barriers in place.

We don't know exactly where Minford's latest figures come from – his group is reporting the research bit by bit to try to get more publicity. But he undertook a similar exercise before the referendum, and it was clear from that that his model was ill-equipped to do the analysis. Indeed that exercise was widely panned. The model they use assumes a reduction in VAT instead of a tariff cut. It also assumes that the burden of regulations will decrease (and rather curiously models that by assuming a fall in the employer's rate of national insurance). Now if the EU regulations that our exporters face when they sell to the EU could be magicked away just by us leaving the EU, there might be some case for doing that, but otherwise it's bonkers. No, let's just tell it like it is... it is just plain bonkers.

Here's a picture that the Resolution Foundation produced, showing the 'before the referendum' and 'after the referendum' forecasts of economic growth made by every forecaster surveyed by the Treasury in its regular compilation of UK forecasts. The red dot is the forecast in July 2016 (after the referendum), the blue dot in June (before). In all cases but one, the expected impact of Brexit is clearly negative. The one exception is Patrick Minford.

The BBC – which, during this August silly season has given much prominence to the Economists for Free Trade report – needs to take a long, hard look at itself. By following a remit on 'balance' that is designed for political balance during general elections, not referenda, it has provided a completely unrepresentative view of the technical aspects of Brexit. (Bizarrely, it does the same thing with climate change when it gives the likes of Nigel Lawson a platform.) Balance should apply when there is a discussion about values - and of course there are some values-based arguments surrounding Brexit, and that is perhaps where the confusion comes in. But on a technical issue, where the science is clear, cranks should be treated as cranks. This really is flat earth stuff.

Tuesday, August 15, 2017

The UK government has published a document on future customs arrangements with the EU, in which two possible models are floated. The first of these involves a ‘highly streamlined’ system in which existing procedures are largely maintained alongside ‘technology-based solutions to make it easier to comply with customs procedures’.

The second involves the UK mirroring EU procedures when imports that will subsequently be exported to the EU enter the UK – thus allowing seamless movement of products between the UK and EU. Just how anybody will know which imports will later be exported is anyone’s guess. The government’s document refers to ‘simplifications for business, such as self-assessment’… which sounds a lot like complications for business.

The opportunities that will exist to strike trade deals with third party countries undoubtedly offer the UK some potential to benefit. This comes, however, at a cost – most notably bureaucracy. Clearly the UK should not be able to import products from a third country with a tariff that is lower than that applied by the EU, simply to export them to the EU without tariff. But it might be possible for UK businesses to process these products and sell their output to the EU at zero tariff. A call must then be made in determining how much processing or modification is needed in order to qualify a product for tariff-free export to the EU. Hence the need for rules of origin. Devising and subsequently implementing these rules is a huge undertaking – though technology (elsewhere in the document described as involving a ‘risk-based and intelligence-led’ approach) can certainly, albeit with imperfection, help.

The first option presented by the government’s document could be highly streamlined indeed if the UK were to be free to strike its own trade deals but did not take advantage of that freedom, and if it inherited all the trade arrangements already made by the EU (unlikely though this scenario might be). The existing customs union would then remain in all but name. A somewhat less streamlined mechanism would allow exceptions, albeit at cost that would need to be balanced against the benefits.

Whatever final arrangements are agreed, the UK government is proposing a transitional period. And – noting the British penchant for solving problems by changing the name – whatever it is called, at least the transitional arrangements should look very much like the customs union that currently exists.

Thursday, August 10, 2017

Industrial production in June of this year stands at 0.3% above the level a year earlier. Despite the fact that output in June was almost 0.6% above that achieved in May, the trend is still one of rather sluggish performance. Indeed, my neural network forecaster predicts a return to negative growth in this series over the coming months. This ties in with recent predictions of slower GDP growth over the coming two years. As ever, caution is needed in interpreting these forecasts, especially given the unusually uncertain environment presented by Brexit negotiations.


Friday, July 07, 2017

The latest data on industrial production have been released and show slight falls (month on month, quarter on quarter, and year on year). This continues the recent trend. My neural network forecaster for this series suggests a likelihood of continued (quite sharp) falls over the coming months, followed by a recovery. The usual caveats apply, of course, especially given the major uncertainties presented by, amongst other things, the Brexit negotiations.