Recovery enters an uncertain phase
FOR the first time for almost 18 months, I’m worried about the economic recovery. A number of key UK and global indicators released yesterday suggest that the Western nations are slowing again, with Britain not immune from the bad news. The biggest change seems to be a slowdown in manufacturing: after powering the global bounce-back on the back of recovering trade and Asian demand, producers are seeing growth weaken significantly. In part, this is because of a cost explosion, led by oil prices, but there are also other factors at play, including a continuing housing crisis in the US. This may just be a blip of the kind recoveries inevitably see – we will only know for sure in a couple of months’ time. But US investors panicked yesterday, buying Treasuries and pushing the yield on 10-year bonds back under three per cent for the first time in ages.
Until now, I was on the more “optimistic” side of the UK debate – of course, a relative concept which these days means decent job creation and GDP growth of 0.5 per cent per quarter. There has been much scare-mongering and nonsense, mainly by those trying to claim that the economy was about to implode because of cuts. But with a net 416,000 jobs created in the UK over the past year – and well over that number created in the private sector – the recovery has been decent so far. It has certainly been much stronger than most commentators have acknowledged – but in their defence, this has been camouflaged by the reality that out-of-control inflation and higher taxes have cut take-home pay for almost all Brits.
The additional problem now is that manufacturing is also slowing, as demonstrated by yesterday’s purchasing managers’ index (PMI) reading of just 52.1 (this suggests growth is now pretty feeble). And in a development which will terrify the Bank of England, pay rises are starting to accelerate for the first time, with the average settlement in the private sector reaching three per cent, according to figures out today from Incomes Data Services. While temporarily good news for workers, it suggests that an inflationary price wage spiral is building, confirming the fears of those who have long been arguing for higher interest rates.
All of this suggests that the second quarter will see a slowdown, exacerbated by the extra Bank Holiday and the fact that car makers are still suffering component shortages because of the Japanese earthquake. The official view that the economy merely stagnated overall during the fourth and first quarter is clearly overly-pessimistic: it is based on a supposedly dire performance by the construction sector in the first quarter of the year, but this is explained by a dubious new measurement method. The industry has said that its performance was actually much better. The figures are also refuted by the fact that the private sector created a large number of jobs during that six months period – zero growth would have signaled an unlikely slump in productivity. Eventually, the official stats will be revised up. But all of this is primarily of historic interest – economic conditions appear to have become more difficult since April, even though the manufacturers’ trade group the EEF has noted that credit is becoming much easier to obtain.
It is not time to panic yet. One month’s data doesn’t mean very much. But at the very least the economic recovery is now entering a more uncertain phase.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath