Tuesday, February 1, 2011

UK PMI Numbers and M4 are Indicating Growth

Don't Count Off UK Engineering Just Yet

UK Manufacturing PMI numbers rose to a new high at the start of 2011. According to the report

"UK manufacturing steamed ahead in January as the sector continues to expand quicker than even the most optimistic amongst us could have predicted. As well as improved market conditions abroad, demand in the UK market also showed signs of growth. This is the much needed kick start to 2011 everyone in the sector was hoping for,particularly in the light of last week's poor GDP figures.'

and this demonstrates the resilience of the sector in the face of considerable cost pressures.

It also suggests that the UK is capable of developing a thriving and competitive manufacturing sector in spite of increasing global competition. There was some other good news from the Bank of England.

Bank of England M4 and Lending M4 Figures 

Source: Bank of England

They indicate that some lending is returning to the Household sector and to Private Non Financial Corporations (PNFCs).

Whilst this is nowhere near the levels of the early naughties, I doubt that anyone would want it to be!

What it does indicate is a gradual transition to the much talked about 'new normal' of lending.

Source: Bank of England
The lending effect can be seen when taking a look at the second chart which excludes the effects of securitisation.

Excluding securitisation, M4 growth remains negative. All of which goes to reiterate the importance of getting the capital markets going again in 2009. The recovery would not have been sustainable without it.

Cameron's Economic Priorities

The UK manufacturing sector has demonstrated that it can be competitive and generate growth. The 2001-2003 recession was caused by the aftermath of excess of capital spending which was aided and abetted by a stock market boom. UK corporations learnt the lesson and when the recent recession hit, they were in pretty good shape to handle it. Moreover, they generated good growth in the recovery, despite a major resumption of bank lending. Indeed, Industrials have led the stock market rally.

Unfortunately, by insulating financial corporations from the full effects of creative destruction, the same learning process may not be taking place in the banking sector. I have to gaze on in incredulity as the UK banking sector prepares to award itself £7bn in bonuses, meanwhile its assets are threatened by ongoing doubts about some peripheral European Sovereign Debt.

It gets worse. The last few years have seen a massive shift of resources from the taxpayer (households and PNFCs) towards the financial services industry. I need remind no one that this is a failed industry.

As a consequence, it is fairly easy to see what Cameron and Osbourne should be focused on.
  1. Enforce the separation of investment and commercial banks in the UK. Too Big To Fail can never be allowed again. Lending is too important to the economy
  2. Allow the market to increase the supply of housing by deregulating. This will spur growth and employment and slowly wean the UK of housing speculation as a career path
  3. Support manufacturing and IP based endeavour as a growth opportunity for the UK. Not only by doing the above, but also by encouraging private sector investment
The simple fact is that the default position of UK politicians is to kowtow to the Financial Services industry. In fact this practice has got so insidious that it directly impacts the growth opportunities for the rest of the economy. UK manufacturing doesn't even have to ask for any favours. It just needs a level playing field.


Sectoral Breakdown of M4 and M4 Lending Bank of England Website (Accessed 1st February 2011)

Markit/CIPS UK Manufacturing PMI  Markit website (accessed 1st February 2011)

The Bank of England released statistics for M4 money supply. These figures are important because historically M4 growth has correlated nicely with future GDP growth. I've added the charts.

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