The state of the economy

 

              The week-end press had started to wake up to the private sector squeeze which we have been talking about on this website  for the last year, the squeeze which was even heralded by the Bank of England itself. The high rate of inflation coupled with a low rate of wage and salary increases is squeezing spending power.

             At the same time there is a recovery underway, which has been best so far in manufacturing. The Bank which likes to cling to the notion that there must be plenty of spare capacity in the economy because of the depth of the recent recession, should get out more. They would discover that large manufacturing companies rely on a worldwide supply chain. They would learn that there are shortages of raw materials, components and manufactured goods around the world. The Japanese earthquake and tsunami has just made this worse by removing some Japanese capacity. The fast growth in India, China, Brazil and the other emerging markets is keeping things lively.

         Some of the world’s main manufacturers are trying hard to get more components and materials to meet their growing output. Some are even talking of putting customers onto quota and allocation, as they cannot keep pace with demand. In the UK input inflation is running at very high levels. It’s not just oil and energy that has rushed up, but so have metals, foodstuffs and a range of semi manufactures and components. The rapid printing of dollars, the strong money and demand growth in the BRIC and related countries, and the shortages now emerging are inflationary as some of us have been predicting for many months.  In China, India, Brazil, Australia and elsewhere interest rates have been put up to cool things down a bit. The cost of inputs to business shot up by almost 15% in the UK over the last year. Did the Bank forecast that? Is all going to plan?

            In the UK the high costs of motoring appear to be hitting the numbers of people travelling, going to shops and attractions. It is good news that the government now says it wants to do something about that, starting with fewer MOTs. It also needs to do more to ease congestion on the roads at busy times, which is often the result of poor traffic engineering, or the direct result of Council and government spending to cut the flows on the road with expensive new traffic engineering schemes.

           I was also pleased to read that the government plans to ban Councils from taxing and fining people who fall foul of increasingly arcane rules on rubbish. That may not be very localist, but it is very welcome news to people who now fear the bin police along with all the rest of the bureaucratic snooper army.

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18 Comments

  1. norman
    Posted April 11, 2011 at 7:04 am | Permalink

    The MOT change is to pre-empt the new EU rules coming in to play (from the excellent EU Referendum blog http://eureferendum.blogspot.com/2011/04/keeping-us-in-dark.html) so while we’re always happy to criticise the EU here I think credit where it’s due this time.

    On the other hand, I’d be happier with one year intervals and deciding ourselves what we should do but then I am a bit of a fruitcake.

  2. Boudicca
    Posted April 11, 2011 at 7:45 am | Permalink

    The Government ‘may want to do something about MOTs’ – reducing them to bi-annual, but as explained in the link below, this is only to pre-empt an EU Directive so it can pretend it has a choice and is in control (which it isn’t of course, the EU is). that’s not to say it isn’t a good thing, but Mr Redwood should admit that our real Government is now in Brussels; the Coalition is just another puppet-government for the EU, so it can hide its strength from the sheeple.

    http://eureferendum.blogspot.com/2011/04/keeping-us-in-dark.html

  3. Euan
    Posted April 11, 2011 at 7:55 am | Permalink

    We hear the word “recovery” all the time. The BBC and other media have used it every week since 2008. What does it actually mean? Recovery to a debt fuelled spending binge with house prices spiralling ever further from reality? Recovery to a system that relies on cheap oil and cheap imports to avoid collapse? I’d say that world has gone. What we are far more likely to get is ever higher taxes and inflation that impoverishes us more every day.
    I see no evidence that this government has the guts to do even the smallest cut to our appalling deficit, nor to the regulation burden we all face. It’s going to take a lot more than a bit of tinkering to some motoring regulations (welcome though that is) to arrest falling living incomes and worsening finances.

  4. lifelogic
    Posted April 11, 2011 at 7:59 am | Permalink

    Agreed they should also get rid of the money grabbing SORN system of off road declarations. Many have fallen fowl of by this, doubtless as intended by the department, by failing to submit a piece of paper that they did not know they had to submit if the vehicle was not being used. Also the oppressive waste licence rules.

  5. NickW
    Posted April 11, 2011 at 8:47 am | Permalink

    “The MPC should get out more”.

    Anyone who lives in the real world could have told them that spare capacity is a myth.
    There is a significant waiting time for most major purchases.

    On a different subject, am I alone in applauding the Icelandic Government and its people for refusing to shoulder its Bank’s debts? The Irish should have done the same, and so should we.

    I do not want any legal action taken against Iceland in my name; I find it abhorrent.

    I cannot help feeling that the world would be a better place if Iceland’s actions were the norm, not the exception.

    • StevenL
      Posted April 11, 2011 at 10:40 pm | Permalink

      I agree. I cannot for the life of me see where this idea that citizens provide a gurantee to the creditors of all limited liability banks has come from all of a sudden.

      Corporate bonds and other such paper never were ‘risk free’ assets. We’re being completely sold down the river here.

      I too salute the people of Iceland!

  6. Lindsay McDougall
    Posted April 11, 2011 at 8:49 am | Permalink

    The recovery is going to have to be led by exports and by import substitution. There is no other way. Reduced real labour costs and an undervalued currency help in this regard.

    Another thing to remember is that, just as there is no such thing as a bank that is too big to fail, there is no such thing as a country that is too big to fail. America is going to run out of road sometime next year, right in the middle of Barrack Obama’s campaign to be reelected. The combination of tax cuts insisted on by the Republicans and the administration’s refusal to curtail public expenditue has meant that America’s large fiscal deficit has continued.

    When America finally gets round to reducing its fiscal deficit, it will be unable to act as the World’s growth engine. That will have a negative impact on our economic growth.

    • waramess
      Posted April 11, 2011 at 10:33 am | Permalink

      The USA will survive both Bernanke and Obama and fight another day. What other economy has the benefit of 50 contiguous states all speaking the same language and a population of over 300 million people?

      • Stuart Fairney
        Posted April 11, 2011 at 3:36 pm | Permalink

        Will it indeed? Sure the country will physically still be there, but watch out for a serious impoverishment when the dollar is dumped as the world’s reserve currency (surely just around the corner) and serious inflation takes hold and American purchasing power is dimished. Indeed, we may see some states (the oil and mineral rich ones) looking to cede. I wouldn’t blame them.

        The end of the Soviet Union and what happened to Russia is a good guide.

  7. waramess
    Posted April 11, 2011 at 10:29 am | Permalink

    Interesting that Germany is not finding the same problems with its manufacturing sector. Maybe our Keynesian monetarist solutions are not right for the job?

    Reply: On the contrary, German companies are experiencing exactly the same capacity and input cost problems.

    • waramess
      Posted April 11, 2011 at 6:34 pm | Permalink

      I would be interested to know your source

  8. HJBbradders
    Posted April 11, 2011 at 11:33 am | Permalink

    In Germany the TUV equivalent to the MOT has been set at 2 years intervals for a long time now.

  9. forthurst
    Posted April 11, 2011 at 2:40 pm | Permalink

    Why is the BoE so concerned about spare capacity; there remit is to control inflation which they are signally failing to do? Have they reinterpreted their remit to only measure inflation which they believe is caused by, or likely to be caused by wage pressures? How is spare capacity in the public sector measured? When do they know they have enough Climate Change Abatement Executives or Lesbian, Gay and Transgendered Outreach Officers?

    The idea that inflation due to raw material input costs will have been ‘a one off’ is obtuse.
    Those incredibly clever people who devised so many ways of leveraging dodgy mortgages have unsurprisingly moved on. Selling virtual CDOs for virtual money has given way to leveraging real commodities as both a source of revenue and a store of wealth (FED notes will not do nicely anymore); if it is possible to make a lot of money and cause enormous disruption to the world economy with dodgy mortgages, just think what havoc the masters of the universe will cause with all those food staples, fossil fuels, metals to play with. Whatever, world demand and competition for natural resources will continue to increase and so will prices. Our only salvation is in re-engineering the economy, exclusively, toward high added value. While we are busy putting windmills (an ancient and unreliable energy source) on our roofs and in our areas of outstanding natural beauty, the Chinese are investing heavily in Thorium powered reactor technology.How are we to compete with a country run by engineers? While they are still building fossil fuel power stations pro tem, we are phasing out all our base load, meanwhile Fukushima has put up the design and build costs of conventional uranium fueled power generation, substantially. What is the average value added per lifetime of a graduate engineer? What is the corrsponding figure for a sociologist?

    • Simon
      Posted April 12, 2011 at 7:16 pm | Permalink

      When you’ve played the board game monopoly a couple of times you learn that once the odds are stacked against you there is no way back and the game becomes pointless – unless you are a Master of the Universe sort .

      How perverse that once they have made more money than they could spend in several lifetimes that they derive further pleasure is by suppressing people weaker than themselves and enslaving the unborn in debt .

      Come to think of it more like chess than monopoly .

      A sociologist might at least be able to tell us the correct name for this character defect .

  10. alan jutson
    Posted April 11, 2011 at 3:31 pm | Permalink

    Price of raw materials is certainly rising in the building trade.

    Lead, copper, plastics, timber, steel, to name but a few.

    Always know when the price of certain materials is getting high, theft of such materials increases from sites, and drain covers start to go missing, as they have done in Wokingham of late.

    Much of our raw materials are imported from abroad, and with a weaker Sterling rate, are bound to cost more.

  11. Simon
    Posted April 12, 2011 at 10:18 am | Permalink

    PS my best friend and a good friend are MOT testers and I’ve spent a lot of time under and around cars and motorcycles .

  12. Simon
    Posted April 12, 2011 at 11:59 pm | Permalink

    Sorry , reduces income by a quarter , not a third .

    One thing to note about the EU replacement for the MOT test is that it talks about quote “Illegal engine modifications” .

    No that doesn’t mean filling a crankcase with drugs and driving where they are in demand or packing the coolant passages with emplosive in order to turn it into fragmentation bomb .

    Apparently , it means doing something they don’t want you to do like making it go faster or use less fuel .

    I’ve personally built a 1973 US Ford V8 to make over 300hp and put it in a lighweight Dagenham Dustbit of the same era .

    The most dangerous part of a car , ie the bit that goes on top of the drivers seat , is definitely on borrowed time if these people get there own way .

    The wording tells you everything you need to know about the EU and freedom as if you didn’t know already .

  13. Vanessa
    Posted April 13, 2011 at 3:13 pm | Permalink

    And I thought it was because of the EU landfill tax that councils were so arcane on rubbish! Silly me thinking that the EU now rules us over everything. What exactly do you lot DO in parliament except send stupid little emails to all and sundry while the EU gets on and dreams up thousands more new idiot ways to make us pay even more tax – global warming etc.
    Have a look at this (scroll down a bit) to see a proper forecast for our summer and winter. http://www.exactaweather.com/UK_Long_Range_Forecast.html

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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