Fortnightly insight into the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.
See: www.strategiceconomics.co.uk
The Economics Story: lots of news but little new…
It’s been a busy week for new economic data. Without going through each release in detail, we can summarise the story as follows:
International – EU stocks adjustments caused falling output in Germany, France and the Euro-Zone as a whole in the last three months of 2012. UK productivity is still well below rivals in Germany, France and the United States. These two facts partly explain last year’s record trade deficit for goods and services, including some shift of share away from EU markets. This will all have slowed aggregate demand, hopefully temporarily, for some Dorset companies.
National – Industrial production was still below year-ago and pre-recession levels at end of 2012. But, there was a big difference between good growth for some capital and high-tech durable products and no growth for consumables. Overall retail sales volumes were down 0.6% in January. Internet sales continued to take sales from the High Street, causing structural turmoil with store chain closures. In January, inflation was stuck at 2.7% (CPI) for the fourth consecutive month. Given these mixed UK statistics, Dorset companies face a wide range of business conditions. Depending on where they sit in the supply chain, they tell very different tales of relative expansion and decline.
Regional – According to the purchasing index, SW output was a bit better in January but employment was worse. On both measures, the region has performed below the UK average since the middle of last year. New orders were positive but business outstanding negative. East Dorset, however, may be benefiting from its proximity to stronger activity in the South East where recent jobs and output growth is better than the national average.
Against this statistical background, the Governor of the Bank of England delivered his latest inflation report this week. His message was clear: there is not a lot the Bank can do to bring inflation down to target quickly. Indeed, it will go up before it comes down. Also, with monetary policy (through QE etc) already very loose, he did not see a way for the Bank to stimulate growth.
Nevertheless, Mervyn King was optimistic for a modest recovery this year, based on the fact that construction cannot be as bad again and manufacturing and private services are already making progress. He recognised that a lot depends on domestic and export demand, which remains constrained by downward pressure on real incomes at home and abroad. The hint may have been that fiscal measures (tax cuts and deregulation) to stimulate spending might be appropriate. I would agree.
More importantly, spending should be focused on things that will improve long run potential by boosting productivity – infrastructure, skills, innovation and competitiveness. Can the UK borrow at today’s low interest rates to lay foundations for tomorrow’s growth?
Meanwhile, the stock market is forecasting a moderate upturn and there are signs of more confidence in Dorset business. If that is accurate, perhaps we can discount some of the latest data and look forward to the spring.
Nigel Jump
