When is good news good news?
The August Index of Production results from the Office for National Statistics make quite cheery reading at first sight. The Index of Production stood at 89.4, up 4.2 from August last year. The separate Index of Manufacturing stood at 91.2, up 6.0 on a year ago. These are the largest year-on-year increases for 15 years, and the 16% increase in the index for machinery and equipment is particularly welcome. A 7.7% increase in food, drink and tobacco was also very healthy.
The Index of Production is an important statistic; it’s very closely related to what is happening in the real economy and so it is very closely connected to things we care about like jobs, pay and government income. But you have to read it carefully. Firstly (and most importantly), figures for August are too early to reflect the effect of the cuts the coalition began announcing in June and July. So we are not seeing public spending cuts ‘crowding in’ private sector activity. What’s more likely is that these figures reflect the favourable climate for exports created by the mild global recovery of the second half of 2009 and first half of this year.
Secondly, we need to bear in mind the depth of the recession. Last August, the Index of Production was 85.8, its lowest for twenty years. At 86.0, the Index of Manufacturing was at its lowest since 1991. The annual change looks so good because our point of comparison is this low point. There was a burst of improvement in the first three months of this year and both indexes have eased off since then:
If you compare the inexes for August with those for July the increase was a much more modest 0.3%.
But, then again, this is almost exactly in line with the trend since April, and this modest performance is better than what was being expected by the people in a position to forecast today’s figures. In other words, these figures don’t mark the start of the slow-down I still expect for some time this year.
A final point on the question about whether these figures are good news: the indexes were set so that production in 2006 equalled 100. We’re still down ten per cent from that figure, so we have a long way to go to make up our losses. Even more worrying is what happens when you look at these figures from a longer perspective:
Even if we cut out the last two years, this picture would still be shocking. It is a useful reminder that dealing with the recession and the public finances isn’t the only economic task this country faces. After they’ve been dealt with we still have to sort out the stagnation of manufacturing.