Team GB is doing brilliantly – but the British economy isn’t

Allister Heath
JUST as some had started to worry, Team GB delivered spectacularly yesterday, thanks in no small part to Bradley Wiggins, our new sideburned national hero. GB Plc isn’t performing as well, unfortunately. Manufacturing output is shrinking disastrously. The manufacturing purchasing managers index slumped from 48.4 to 45.4 in July – its lowest level since May 2009. We now await services: a poor number there would almost guarantee a grim third quarter, especially given that the Olympics will reduce GDP by more than they will increase it.

It is not just Britain which is suffering. Manufacturing is in crisis globally. The US is also suffering from a shrinking manufacturing sector: the ISM index came in at 49.8 in July, leaving it almost unchanged from June’s 49.7. The Eurozone PMI for July was just 44.0, its weakest since June 2009. Japan is also in contraction territory, as, most worryingly of all, is China. But none of that will help George Osborne, who desperately needs to come up with a proper supply-side growth plan before he loses the trust of his party.

IT is only when things go wrong that we can test a market’s resilience. On that measure, the US equity markets performed relatively well yesterday. The chaos on the New York Stock Exchange, caused by a technology failure at Wall Street market maker Knight Capital, was dealt with much better than previous such episodes. Contrary to many, I see nothing wrong with high frequency trading, as long as it is conducted sensibly – but the key is for exchanges to put the right rules and circuit-breakers in place and to continue to improve procedures to deal with the sort of algorithmic malfunction seen yesterday.

NYSE Euronext was right to cancel trades that took place in six of the most affected stocks; in each of those cases, prices had swung by over 30 per cent in just 45 minutes. But as the Kid Dynamite blog argued last night, the market responded remarkably well to the disruption: one stock traded a hundred times its daily average volume, and yet its price never fell by more than 10 per cent. Private shareholders would have been largely unaffected by all of this, while professionals made a killing from Knight’s blunder. But it was a near miss, and still more needs to be done by the exchanges to make sure these inevitable technological issues can be controlled and neutralised even more quickly.

IT is as times like these that the insights of Derek Scott, one of Britain’s most insightful economists, will be missed. His death at a tragically young age – he was in his sixties, working as a consultant and as a regular contributor to the media – came as a shock. He was that most astonishing of figures: a lifelong Labour party member turned capitalist revolutionary. He served latterly as Tony Blair’s powerless economic adviser, a job in which he opposed Gordon Brown at every turn and eventually wrote a devastating book about. He was a committed Eurosceptic, who understood early on that the Eurozone was an economic monstrosity.

He was one of a very small band who genuinely understood the causes of the bubble and the reasons for our current woes. He advocated more, rather than less, capitalism as a cure for our ills. He was inspired by the work of Bernard Connolly (now at Hamiltonian Associates in New York) and the Austrian economics of F.A. Hayek. He is survived by his wife, Gisela Stuart, the Labour MP; and his ideas, of course, will live on.