The bad economic news keeps flooding in

UK manufacturing output hits a 26-month low as growth forecasts are cut again.

The bad economic news keeps flooding in on a daily basis -- but there's still no response from George Osborne.

Manufacturing had been booming -- not least because of exports driven by the significant depreciation in the pound -- but that appears to be heading into reverse. Today's PMI for UK manufacturing fell to a 26-month low. Production fell for the first time since May 2009, as new order inflows declined at the most marked pace in almost two and a half years. The trend in new export business was also substantially weaker than just one month ago. Manufacturers linked the reduction to weak domestic demand, rising global economic uncertainty and lower levels of new export business.

Rob Dobson, senior economist at Markit, commenting on the data, argued: "The second half of 2011 has, so far, seen the UK manufacturing sector, once the pivotal cog in the economic recovery, switch into reverse gear . . . The sudden and substantial drop in new export orders is particularly worrisome, with UK manufacturers hit by rising global economic uncertainty, just as austerity measures are ramping up at home. As consumer and business confidence are slumping both at home and abroad, it is hard to see where any near-term improvement in demand will spring from."

Then, today, the British Chambers of Commerce cuts its growth forecast. They are now expecting GDP growth of 1.1 per cent in 2011 (down from 1.3 per cent) and 2.1 per cent in 2012 (down from 2.2 per cent), rising to 2.5 per cent in 2013. This is much less than the Office for Budget Responsibility, for example, which is forecasting 1.7 per cent in 2011 and 2.5 per cent in 2012.

This lowering of the growth forecast is consistent with evidence from Grant Thornton's UK Business Confidence Monitor for Q3 2011, conducted between 3 May and 29 July 2011, which showed that business confidence had fallen sharply. The confidence index stands at 8.1, down from 13.7 in Q2 2011 to its lowest level since Q3 2009.

The Confidence Index has been on a downward path since a post-recession bounce-back that started in late 2009 and peaked in the first half of 2010, just as this coalition government took office. Notably, the survey suggested that business confidence in the manufacturing and engineering sectors was "relatively downbeat" and continued to weaken.

And then there were some really daft comments from Andrew Sentance in an op-ed piece in the Wall Street Journal, in which he argued against further stimulus.

"The global economic recovery has been under way for about two years . . . Monetary policy needs to shift away from the emergency settings that were put in place to halt sharp falls in demand in late 2008 and 2009. The deflationary risks that were then a worry have now receded. Indeed, in some countries -- such as the UK -- persistent inflation is now the bigger worry . . . further stimulus of the demand side would be a move in the wrong direction. It may appear to offer the prospect of short-term respite from economic difficulties. But it will not help us secure the conditions for sustainable growth and lasting economic recovery." Yes it will.

Sentance couldn't be more wrong -- as data from the past few days has made clear, the global economy is slowing fast. It is now apparent that his votes for increasing interest rates at his last 12 meetings were completely misguided as growth plummets and unemployment rises. The UK now has a growth problem, rather than an inflation problem. Wrong on interest rates and wrong on austerity.

Ed Balls had it right today on the World at One: "If you adjust for the high oil prices [and] the fall in the exchange rate, underlying inflation in Britain today is very low indeed. That is reflected in long-term interest rates being very low. Why is that? Because our economy isn't growing . . . Manufacturing output is down and, all around the world in America, in Europe and in Britain, the challenge for central bankers is to do what they can with monetary policy to support growth and get things moving again. The trouble is, in the very unusual global situation we're in, it is hard for interest rates to do that job. That is why there is a challenge to fiscal policymakers to act, as well."

Now is the time for the coalition to act to stimulate growth.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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