The UK’s great depression

12th March 2012

I wish today to examine the UK economy as recent data and information have as a minimum challenged the consensus that had built up about it as 2012 has opened. The consensus in the media has been that we have found some solid economic growth and that inflation will soon be in line with the Bank of England's target of 2% for Consumer Price Inflation. Many articles have treated the latter as a certainty.

Such thoughts if one may describe them as such have involved ignoring the recent strength in the oil price where a barrel of the Brent crude benchmark has risen by 16% in 2012 so far and now stands at US $125.40. As I pointed out in my article of the 24th of February this rise has both inflationary, via cost pressure, and contractionary effects on the UK economy. Perhaps those sure of an inflation fall do not drive and do not have to purchase petrol or diesel at new higher prices.

UK Industrial Production

On Friday we received the latest statistics on this from the Office for National Statistics and the initial headline disappointed somewhat.

"The seasonally adjusted Index of Production fell by 0.4 per cent between December 2011 and January 2012"

If we look back for a comparison to 2011 then we received a firmer jolt.

"The seasonally adjusted Index of Production fell by 3.8 per cent in January 2012 compared with January 2011."

As this point there would have been some outright concern. Month on month numbers can be erratic but such a year on year fall merits further investigation. Doing so makes you spot this.

"This is the 11th consecutive fall on the month a year ago."

What caused this?

"Output of the mining and quarrying industries fell by 21.3 per cent in January 2012 compared with January 2011. This was the 16th consecutive decrease. The biggest decrease was in the extraction of oil and gas which fell by 23.9 per cent."

So a major cause in this is the decline of North Sea oil and gas production and this is something likely to be a continuing factor. I guess the UK government is probably regretting raising the level of taxation on this industry right now and I wonder if the claimed revenue increase might turn out to be a decline in reality in an interesting application of the laffer curve.

Also there was something giving food for thought tucked away in the numbers as energy output fell by 9.3% in the year on year comparison in January. Remember when cold weather was blamed for output falls well now warmer weather can take its share of the blame. Perhaps someone could track down Goldilocks and as her what winter weather is not too hot and not too cold!

Wasn't industrial production supposed to be expanding?

Here we get to the Markit purchasing managers survey for January which recorded 52 for manufacturing and 51.4 for manufacturing. This had looked hopeful but from the official numbers we see that manufacturing did edge forwards by not by enough to help the overall picture by much.

"The seasonally adjusted Index of Manufacturing rose by 0.1 per cent between December 2011 and January 2012."

Actually on a year on year basis the growth rate was only 0.3%. For those who like the overall numbers on a scale where 2008=100 UK manufacturing is now at 95.8 and the overall industrial production figure is even worse at 90.2.

What does the National Institute for Economic and Social Research (NIESR) say?

Continue reading…


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Could the higher oil price tip Western economies into recession?

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