UK manufacturing whether actual (May output) or indicated (PMI for July) is down. And why not?
We are in one of those periods of our history during which we all know our world has changed but we do not know how it has changed.
The following months, and perhaps years, will reveal how our departure from the EU will trickle down through the UK economy. Any participant, personal or corporate, and indeed government department, will begin to discover its suppliers’ and customers’ sensitivity to foreign exchange rates, trade treaties, and open borders, and while it is waiting to do so it will be disinclined to put its capital at risk.
The markets await Mr Carney. For that matter the whole country appears now to await Mr Carney.
He has a two bullet gun: short term interest rates; and printing money to buy long term debt.
The theory emerging in the press is that he will fire the first bullet as soon as this week: base rates down from 0.5% to 0.25%.
Now I am a simple rural corporate financier, but if I was not going to invest the eye-watering cost of a vehicle production line this morning because I do not know if a UK plant remains viable, then I am not going to change my mind on Friday morning because a rate I do not pay has been cut so insignificantly as to be lost as a rounding error in my financial model.
Nor will a drop of 0.25% in yield on cash encourage me to spend. I have been resigned to a high cost of carry for many years, and so another shaving is barely noticeable. I’ll continue to hold cash for the same reason I have been holding it for eight years. My reasons and yours may differ, but we each have them.
Output is and will stay low until we understand the effect of Brexit on our supply-to-sale chain, and where and how we should carry out our business, and how much of that will be left.
Through Brexit we have discovered the same fault line as that tapped by Mr Trump in the USA. The status quo may benefit many in each economy, but for others it is economic failure. Radical change offers the chance of improvement for them, with the perceived downside no worse than they have. And so we have uncertainty until we can digest the effect of change.
Output will remain down because uncertainty remains and not because interest rates are shaved. Perhaps it would been less uncertain had either Remain or Leave had a 'Plan B' to manage Leaving. Neither did, and so we start from our self-created Ground Zero.
