Is the UK heading for a ‘big fat Greek mess’?

The UK economy continues to limp along. The good news this week was the PMI index of manufacturing’s unexpected jump to a 16-year high. Export orders showed the strongest growth in 14 years. The survey also pointed to the first rise in employment in the sector in two years. The bad news was that in the much larger services sector, the PMI index slipped back to the lowest level since last August. Mortgage approvals also dipped for the first time since December. And a year after quantitative easing began, the money supply and bank lending are barely rising.

What the commentators said

The boost to growth seen in the manufacturing survey is likely to be temporary, said Markit’s Chris Williamson. A key one-off factor is companies replenishing stocks after running down inventories.

In a downturn, companies cut stocks, fearing a slide in demand. This has a major knock-on effect. If a firm typically holds five months’ stock and skips an order for a month, it cuts its overall inventory by 20%, but that represents a 100% drop in orders that month for the supplier. “It’s like those motorway hold-ups,” said Nick Louth on A few drivers slow down and the braking effect “intensifies until… cars miles back are stationary”. When the process is reversed once things look up, growth gets a lift.

But for an overall recovery to be sustained, underlying demand needs to bounce back; it’s “critical that we see some increase in consumer spending”, said Peter Hooper of Deutsche Bank. But that’s unlikely since, like banks, consumers are “recuperating”, said Ian Campbell on Breakingviews. Households have started tackling their huge debt load: net consumer credit slid by almost £2bn in the second half of last year. The higher taxes and spending cuts to come, along with the weak labour market, will also drain confidence and hamper demand, said Roger Bootle of Capital Economics.

Indeed, a double dip is all the more likely if long-term interest rates rise as global investors lose confidence in British debt. As Campbell pointed out, “unless firm action is taken” our rising public debt and poor growth mean a credit ratings downgrade is on the cards this year. There is a “real risk”, said Damian Reece in The Daily Telegraph, that we could end up in “a big fat Greek mess”.

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