Friday, 26 October 2012

Keep Britain Moving…

Source: ONS, Brewin Dolphin
…is the title of the Ford Commercial Vehicles newsletter. And Britain is indeed moving once more as Gross Domestic Product beat expectations meaningfully, allowing the economy to emerge triumphantly from dip two of the double-dip recession. One point which is hopefully conveyed by the above graphic is that dip two was a mere puddle compared to the cavernous ravine of dip one, so suggestions that recent experience proves predictions of a w-shaped recovery would have to be based on some very wonky handwriting.

Nevertheless, the reason growth declined so little was partly to do with the fact that it fell from such a modest height. Real growth in output, after the effects of inflation, is estimated to have rebounded by 1% in the third quarter. That largely offsets the two quarters of subdued activity while we were raising glasses to her majesty, cheering Mo Farah and puzzling over the omnipresence of Paul McCartney. That leaves ‘growth’ at zero relative to last year - as is perhaps easier to see on the graph below.

Source: ONS, Brewin Dolphin
The final note on GDP is that these numbers are subject to revision of a little under 0.5%. The failure of the UK to rebalance is a much lamented tale and has several symptoms. One is that the country has a diminished manufacturing sector which might otherwise benefit from the 30% decline in the value of sterling in 2008.

That won’t have been helped by the apparent decision of Ford to close its plant in Swaythling, near Southampton, where the iconic Transit van has been being built since 1972. This is the flip-side of having flexible labour costs and relatively high wages, and is indicative of the fact that enhancing competitiveness is as much about having low labour costs as it is about having low taxes and flexible labour markets.

Ford will actually be suffering far more restrictive labour policies when they relocate the Transit to Turkey and the Mondeo to Spain (as seems to be the plan). In Turkey redundancy costs are 30 weeks salary; Spain’s are 17 weeks; and even Germany, whose plants remained untouched by the European restructuring, are a mighty 22. These rates compare unfavourably to the UK (just 8) and Belgium, whose mammoth Genk plant is being closed, which has redundancy costs of just 6 weeks. 

Source: World Economic Forum, Global Competitiveness Report

Ford, it seems are driven by price as much as anything else as they can obtain labour at £4 per hour in Turkey, while Germany retains its status of champion of competitiveness as it has no minimum wage and the infamous mini-job scheme which evades such restrictive employment conditions.

In the meantime the UK may be in transit, but unfortunately so are Ford jobs.

Guy Foster
Head of Portfolio Strategy

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