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
Recent data is pointing to some forward progress within the prolonged downturn. But, itcould still be two years before we can start to use the word upturn.
In the second quarter of 2013, the UK economy expanded by 0.6% quarter-on-quarter and 1.4% year-on-year. This was a modest, but welcome, improvement from a low base: output was still 3.3% below its pre-recession peak. Services (-0.2%) are almost back to where they were in the late 2000s but manufacturing (-10%) and construction (-18%) remain well down on previous highs.
Recent business surveys indicate a positive shift. For example, the purchasing managers’ index (PMI from Markit/Lloyds) for SE and SW England recorded expanding output, new orders and employment in each month from April to June. By the end of the quarter, all three measures were running higher than they have done for some time. Furthermore, the better economy has been reflected in falling claimant count rates across the south. In June 2013, all our local enterprise partnership neighbours had claimant counts lower than a year earlier and lower than the English average (3.4%): Enterprise M3 (Hampshire outside the Solent area) 1.4%, Heart of South West (Devon and Somerset) 2.2%, Solent (Southampton, Portsmouth and the Isle of Wight) 2.3%, and Swindon & Wiltshire 2.2%. Dorset itself had a rate of 1.9%.
For individual firms, it is still a mixed business picture. Some are growing and hiring; thanks to strong order books, including exports, and good value added/profitability. Some are marking time with little incentive or aspiration to expand. Others are barely hanging on, with low productivity, poor demand and, therefore, weak investment intentions. A more positive mood is emerging but significant output and earnings gaps remain and they will not close soon. UK growth of about 1% in 2013 will leave the economy well below potential.
Upturns usually come when replacement demand, especially the investment accelerator, starts to kick in, reflecting higher profits in response to increased productivity and lower costs (especially loan interest rates). Investment begins to create demand that generates a sequence of higher orders, output and eventually jobs. One of the things prolonging the current downturn is that, although businesses are generating good profits and interest rates are being held down, this is not being funnelled into new investment.
A number of reasons might explain this logjam:
- The severe downturn means there is a lot of lost ground to make up. Moreover, it has damaged underlying growth potential and productivity. Lots of new investment is not necessary for the rates of growth so far experienced or soon expected.
- Government policy is pursuing its own investment malaise and yet allowing monopoly rents that dissuade fresh private effort. Executive incentives, especially in quoted companies, currently favour less risk – building market share rather than investing for growth. Furthermore, the investment that is occurring is more likely to go to growing markets outside the developed countries.
- More and more intangible IT application is replacing physical investment and labour but it is less well recorded in the statistics. There may actually be more investment going on than we know and it is in a form that, while ultimately promising higher productivity and growth, may be disruptive and displacing in the near term.
The investment logjam will not hold forever. Its breaking is a key signal to look for if the downturn is to move to an upturn in the years ahead.
Professor Nigel Jump, 2nd August 2013
