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.

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.