It was good news across most of the world yesterday – at least it was good news as far as manufacturing went. And for the UK, which really needs a recovery made of more than just rising house prices, the news was especially good. Nay, ignore that. It was spectacularly good. Can it last?
Do you remember the summer of 1994? In July a chap called Tony Blair became the new leader of the British Labour Party. In August the Provisional Irish Republican Army declared a cease-fire. In that summer Brian Lara scored the highest individual score by a batsman in first class cricket and Wet Wet Wet’s song ‘Love Is All Around” went to number one and stayed there for what seemed like forever.
Something else happened in 1994. The Purchasing Managers’ Index (PMI) tracking UK manufacturing saw its index for manufacturing output and another tracking new orders hit a peak. Neither of the indices has been higher since.
But in August 2013, according to the latest PMI for Markit/CIPS, the index tracking output rose to its highest levels since July 1994, and as for new orders, this hit its highest point since August 1994.
Not a bad set of results.
That does not mean, however, that the latest data was all good. According to the Markit/CIPS report, input prices rose at the highest rate for two years.
The overall PMI takes it all into account: new orders, output input prices and a number of other measures. The surge in input prices meant that overall the index scored 57.2. That was a two year and a half year high. To put the reading into perspective, any score over 50 is meant to suggest growth.
The truth is that the apparent recovery in manufacturing across these shores provides genuinely encouraging news on UK plc.
A recovery led by rising house prices and consumers running up debt would be worrisome. One led by manufacturing, investment and exports, especially if those exports are to emerging markets which are themselves growing, is more encouraging.
Right now, there are signs that the UK is enjoying both.
But, sorry to introduce a niggle, the index tracking new export orders points to growth, but it has not risen for a while now. Some fret that this may be a sign that much of the UK recovery in UK manufacturing is being led by internal demand, which itself is coming off the back of leverage.
The hope is we will get a kind of virtuous upwards circle. Remember, at the moment wage rises are lagging behind inflation. If consumers are spending more on average, they are doing this by running up debts. But if as a result of this, manufacturing output rises, and we see a rise in construction – especially residential construction – then we may see the creation of more better-paid jobs. This may help to create a more sustainable recovery.
The fear is that we are just re-running the noughties. Back then consumers ran up debts, they spent, and the UK economy became more and more imbalanced.
What we need is more investment. Alas the latest lending data points to more mortgage lending and less business lending. It is tempting to say that the UK has the same old weaknesses, and that despite a very severe recession, nothing has really changed.
It may be more accurate to say we have seen changes, but also that banks and their models have not changed much. Before 2008, it was they who loved providing mortgages, but were reluctant to provide what they saw as high risk business loans. They feel the same today.
© Investment & Business News 2013