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The UK manufacturing PMI reaches 52.1 in March 2012

New export orders rise for the third time in the past four months.

The seasonally adjusted UK manufacturing purchasing managers’ index (PMI) rose to a ten-month high of 52.1 in March 2012, from a revised reading of 51.5 last month, according to a survey of 600 industrial firms conducted between 12 and 27 March 2012 by the Markit/The Chartered Institute of Purchasing & Supply (CIPS).

The PMI is noteable, as it tends to be a strong predictor for the official statistics, which are released quarterly rather than monthly. A PMI of above 50 implies that that sector is experiencing growth, and below hints at contraction. In the historical chart above, the recession is clearly visible – as is the minor dip into shrinkage that may represent a double-dip. We will find out the truth of that later this month.

Improved demand from both domestic and overseas clients, enhanced new orders and efforts to clear backlogs of existing work have led to a further increase in production during March 2012. Cost inflationary pressures are also intensifying due to high oil and metal prices.

Output and new orders expanded throughout the first quarter. New export orders increased for the third time in the past four months.

New export orders increased for the third time in the past four months, reflecting new business wins in Africa, South-East Asia and Japan. Cost inflationary pressures continued to surge higher in March.

Average purchase prices rose at the quickest pace since last August, a marked turnaround from the sharp decrease signalled only two months earlier. Indeed, the extent of the pickup in cost pressures since the start of the year is among the steepest in the 20-year survey history. Manufacturers reported higher prices for electronic components, metals, oil, plastics and transportation.

Increased purchasing costs filtered through to the factory gate, as average selling prices rose at the fastest pace in six months. However, the rate of inflation was substantially below that for costs.

However last month saw little change in the level of manufacturing employment, following a modest increase in the previous month.

Rob Dobson, senior economist at Markit and author of the Markit/CIPS Manufacturing PMI, said:

UK manufacturing has made a brighter than expected start to 2012, with PMI data pointing to output growth of around 0.3 per cent in the first quarter. This is obviously nowhere near a strong pace, but it is at least sufficient to prevent the sector from remaining a drag on broader GDP growth. Inflows of domestic and export orders also showed some improvement in March, but exporters are having to tap markets further afield as conditions in the Eurozone remain lethargic.

A major cause of concern among manufacturers is the recent upsurge in input prices, which mainly reflects high oil prices. While there are few signs currently of this passing through to factory gate prices, it is creating an unwelcome pressure on margins as strong competition restricts firms’ pricing power. Inflation hawks will be watching this trend closely, as margins can only be squeezed so much until producers need to raise prices.

David Noble, CEO at the Chartered Institute of Purchasing & Supply, said:

The continued growth in manufacturing over the past few months points towards a more sustained period of improvement in the sector, and less chance of manufacturing acting as a drag on the overall economy.

However, manufacturers are still under a great deal of pressure to manage costs and are burning through backlogs of orders to maintain production volumes. Headcounts are being kept to a minimum in part to offset the chronic rising cost of raw materials.

The pick-up in domestic demand for consumer goods and reports of new product launches is particularly positive. Reports that companies are building up inventories of finished goods suggests there is anticipation about a possible uplift in consumer spending. The even balance of expansion in new orders from home and markets outside Europe is also encouraging, helping to neutralise the effects of a weak Eurozone.  

The Markit/CIPS UK Manufacturing PMI is a composite index based on five of the individual indexes with the following weights: new orders (0.3), output (0.25), employment (0.2), suppliers’ delivery times (0.15), and stock of items purchased (0.1), with the delivery times index inverted so that it moves in a comparable direction.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.