It was not the sort of news we wanted to hear, was it? But then we probably all expected it. The Chartered Institute of Purchasing and Supply’s (CIPS’s) latest purchasing managers’ index (PMI) fell to 41 in September, down from 45.3 in August and the lowest ever recorded in the seventeen years that the Institute has been calculating this marker of the UK’s manufacturing performance. According to CIPS, anything below 50 indicates a contraction of activities and this is the fifth consecutive month that the index has stayed resolutely below 50.
UK financial institutions may be taking an awful battering at the moment, but the services sector as a whole appears to be weathering the current economic storm. While still on the cusp of a contraction, August’s services PMI actually increased to 49.2 from 47.4 in July, confounding the pundits who thought it was due to fall. The latest services PMI had yet to appear at the time of writing, but if there’s a fall on August’s unexpectedly high figure, this is likely to place considerable pressure on the Monetary Policy Committee (MPC) to cut interest rates. With UK economic growth now at zero, the pressures on the MPC for a cut will undoubtedly intensify.
The MPC, however, faces a dilemma as consumer inflation remains firmly above target, making a cut somewhat counter-intuitive. Indeed, the Governor of the Bank of England in one of his increasingly regular missives to the Chancellor of the Exchequer has already stated that a “period of muted economic growth” will be necessary in order to put the brakes on prices and wages.
On Thursday, the Central European Bank held the Eurozone rate at 4.25%, though inflation in Europe is a little more under control at 3.6%, according to the latest figures. Of course, interest rates set by central banks are academic as credit becomes scarce for customers in business and consumer sector alike, and even the banks shy away from lending to each other. But, perhaps we should step back from these awful statistics and take stock. At least one leading figure from the business world was prepared to do so last week.
CBI director general, Richard Lambert, speaking at last week’s Conservative Party Conference in Birmingham, struck a cautionary note. He believes some politicians and commentators are using terms such as ‘business’ and ‘financial turmoil’ in the same breath and giving the public a false understanding of the current crisis. Business, as far as he is concerned (and he of all people should know), is knuckling down to the job as it always has.
At the conference, Mr Lambert said his conversations with business leaders revealed “total bewilderment” about what has been going on. With some obvious exceptions in the construction business, he found many, indeed most companies well capitalised and well financed - and still doing reasonable business. The message is that the glass is more half full than half empty, and that the worse we could all do is talk ourselves into a state of despair. According to Mr Lambert, we owe it to these firms to keep a sense of perspective.
He offers three thoughts to hang on to as we pass through these difficult times. Number one: business cycles come and go, the hard times seldom lasting more than two years, unless the politicians really screw things up, that is! Number two: there are real forces for stability in our economy, thanks to a flexible labour market and a sound monetary policy – and not forgetting some world beating companies and an army of dynamic small enterprises to see us through.
Mr Lambert’s third ‘thought’ is not unexpected from someone in his position. Capitalism, he says, is extremely resilient and we should keep faith in the market economy. “For all its messiness and upsets [it] remains by far the best mechanism we have for allocating capital, providing competitive goods and services, and raising the living standards of everyone.”
We shall see.
Les Hunt
Editor
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