Chance of triple-dip falls on strong UK manufacturing

Eurozone contraction continues.

Markit economics has released PMIs for manufacturing across Europe, offering a snapshot of the state of the sector. It remains in ill-health, but the general picture is of a bottoming-out — it may still be shrinking, but the rate of decline is slowing.

(Standard explanation: PMIs, purchasing managers indices, are based on interviews with purchasing managers in various sectors. They aim to determine the level of activity in those sectors, and present them on a scale where 50 is equal to no change in activity, over 50 means increasing activity, and under 50 means decreasing activity. The indexes are not official measures of activity, but are generally extremely accurate predictors)

Spain enters its 21st straight month with a PMI under 50, but it is steadily rising; the reduction in new orders is slowest since June 2011. It's not good news — it's not even a turning point — but it's less bad news than there has been for a while.


Spanish manufacturing index

A similar story is evident in Italy; again, the manufacturing PMI hit a ten-month high [47.8 up from 46.7], but continued to imply contraction in the sector. While the fall in new orders tapered off, though, the pace of job cuts increased, though Markit reports that, anecdotally, the main reason seems to be non-replacement of voluntary leavers. That's about as good as contraction gets.


Italian manufacturing index

France is the darkest spot in the releases. The index fell to 42.9, indicating rapid contraction, and has been below 50 since the summer of 2011. New orders fell even faster — the sharpest rate since the great recession four years ago — and Markit's Jack Kennedy notes that it "suggests further steep falls in output are likely".


French manufacturing index

Conversly — and demonstrating again the split fortunes that we discussed last year — data for the UK demonstrates mild expansion. A PMI of 50.8, down from 51.2, is not ideal in what is still supposed the rapid upswing as we come out of a recession, but it does hint at continued strength in the sector. More importantly, it calms fears that we may be heading for a triple dip recession.

The rise in domestic manufacturing comes mainly from the continued strength of the consumer goods sector — and is partially offset by a contraction in investment goods. While in the short term the economy doesn't "care" which of those spending is focused on, if manufacturing of investment goods continues to shrink, as it has for the last six months barring a brief spike over the winter, then the hangover will be painful when that lack of investment bites.


UK manufacturing index

George Osborne inspects some manufacturing. More of it is happening now than before. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR