A PAINFUL, extended soft patch, not a disastrous hard landing: that was the message from yesterday’s batch of global economic indicators. The US manufacturing survey improved in August, spectacularly refuting widespread expectations of a collapse and fuelling a market rally; the UK’s factory sector is still growing, albeit at a slower rate. Hard-core bulls and permabears alike have been confounded; the truth is to be found in the Third Way – sluggish but positive growth.
The 56.3 reading in the US was the highest since May and was driven by gains in production and employment (any reading above 50 suggests increasing output). The jobs index reached its highest level so far this cycle, suggesting that the bloodbath in private sector jobs may soon be coming to an end. The softness in leading components – new orders and inventories – cautions against exuberance but the overall index argues against a double dip, even in the US, currently the weakest of the largest Western economies. There was also good news from China: its manufacturing index rose from 51.2 to 51.7, its first increase in four months; HSBC’s own Chinese index recorded an even faster bounce. India, meanwhile, continues to boom.
We are hardly out of the woods – South Korea and Taiwan, which are exposed to Western markets, suffered further declines in their rate of manufacturing growth, as did Australia. Closer to home, manufacturing in the Eurozone grew at its slowest pace for six months, confirming that the recovery is losing some steam after a strong expansion. The UK’s index fell to its lowest level for nine months – but its reading of 54.3 still points to solid, above average growth. Yet as the Ernst & Young Item Club points out, this is consistent with the experience of previous manufacturing recoveries. There is no need to panic.
These are merely one batch of indicators but they do confirm my long-held view: the UK is going to suffer from an extended period of weak growth but is very unlikely to suffer an outright double-dip recession. House prices will fall back, as they have already been doing (on average in the UK, if not in London’s hotspots) which will further depress consumer sentiment and borrowing power; highly regulated markets and excessive levels of taxation will cramp the recovery and reduce private sector job creation; the war on banks will continue to limit the availability of credit. This won’t be a Japanese-style, decade-long stagnation but rather a very British period of weak growth, as households readjust to more rational property prices, a smaller state, higher taxes and – in time – to substantially higher interest rates.
The biggest short-term risk is not public spending cuts (which are vital) but a slowdown
in the growth of the money supply. The amount of money held (mainly in bank accounts)
by households and firms stagnated in July but grew at a decent annualised rate of 5.6 per
cent over the last three months, suggesting pent-up demand for goods, services and assets. Non-financial companies’ holdings rose 0.9 per cent in July, pushing annual growth to 4.0 per cent. The corporate liquidity ratio (bank deposits divided by bank borrowing) excluding the struggling property sector is at the top of its historical range, implying continued corporate spending. As long as the money supply doesn’t fall back in the Autumn, the UK’s uncertain recovery ought to continue. Fingers crossed.