Outlook: Manufacturing meltdown opens way for rate cut next time

He must cocoa; Red flag for Hewitt

It is just after midday in the City last Thursday. A car screeches to a halt on Threadneedle Street and out jumps a man. He races into the Bank of England demanding to know where the Monetary Policy Committee is meeting. He charges up the stairs scattering staff in all directions. Halfway up he collides with Sir Edward George sauntering down to lunch and puffing on a fag. "Where's the fire?", asks the Governor. "I am from the Office of National Statistics," replies the man breathlessly, "and I have a copy of the latest manufacturing output figures." "Too late", says the Governor, "we've already voted. Everyone in favour of keeping rates on hold, except Mervyn of course."

No one knows whether the shocking June industrial production figures published yesterday would have altered the vote at last week's MPC meeting. The data arrived just too late. But it is a fair bet that, had it been available, then the debate would have been about the merits of a cut.

The official figures appear to confirm what the surveys have already been hinting at strongly. Namely, that the manufacturing recovery has hit a brick wall. The 5.3 per cent drop in output in June was the biggest since January, 1979 when James Callaghan was still clinging to power and Britain was in the grip of the winter of discontent. Had June's manufacturing data been available last month when the ONS released provisional second quarter GDP figures, then it would been enough to lop a third off its estimate.

Yesterday's little surprise from the ONS came with the usual health warnings. There was a World Cup in June and a two-day bank holiday to celebrate the Queen's golden jubilee. Apart from Virginia Wade winning Wimbledon, those who can remember the Queen's silver jubilee in 1977 will recall a similar fall.

They may also recall that manufacturing output failed to bounce back the following month and 18 months later Mrs Thatcher was leading the country into a deep and painful recession.

There are already plenty of reasons for thinking that the next movement in rates should be downwards. Consumers are losing their urge to flex the plastic and the housing market is beginning to slow down. A double-dip recession in the US looks a distinct possibility and the stock markets remain as erratic as ever. After another nervous session, London ended yesterday below the 4,000 level again.

The Governor is a whisker away from writing a grovelling letter to Gordon Brown explaining why he has missed the inflation target and the latest Inflation Report due tomorrow promises to pose some tricky questions for the Bank – like why it is ignoring the evidence of its own analysis.

He must cocoa

It does not have quite the chutpah of the attempt by the Bunker Hunts to corner the silver market three decades ago. But Anthony Ward is not lacking in ambition and he has got the cocoa market rattled.

Mr Ward is a serious chocaholic and last week his tiny little London trading company Armajaro took delivery of 148,000 tonnes of cocoa. That is about 5 per cent of annual world output and enough to keep Cadbury's in Crème Eggs for the rest of the millennium.

Mr Ward has spotted that cocoa production has failed to keep pace with demand for the last two years and has been steadily building up a long position, during which time the price has doubled.

He is taking a bet that things will stay that way for a while longer, pushing up the price even further. The last time he bet this way and went long on cocoa, the market moved against him and the contract had to be unwound at a considerable loss to his previous employer.

On this occasion his timing is much better. The cocoa Armajaro took delivery of last week is reckoned to have cost around £1,000 a tonne or £148m which, at current prices of £1,300 a tonne, means that Mr Ward is showing a £44m profit.

Although Mr Ward insists that he is a cocoa trader not a speculator, there is little doubt that his actions have squeezed the market and those who are on the wrong side of Armajaro's positions are feeling the pain.

It is in the nature of relatively illiquid markets like cocoa that one trader can move prices if he is prepared to take a big enough position. The next test of his bet will be the September cocoa contract. Mr Ward reckons the West African harvest will be disappointing again and sees no reason why cocoa should not hit £2,000 a tonne this time next year, which gives some indication of the kind of futures contracts he is probably writing now.

Others reckon the Ivory coast farmers have cottoned on and will be planting and harvesting like crazy to meet the shortfall.

Not the kind of business guaranteed to send you off at night, even with a cocoa and a good book.

Red flag for Hewitt

When the going gets tough the tough organise an industry round table. At least that's what they do at the Department of Trade and Industry where Patricia Hewitt has decided Britain's motorsport industry cannot survive a moment longer without the help of the Government.

This is a business which has been doing very nicely thank you for the past 20 years without the intervention of politicians. It turns over £5bn a year and employs 40,000 people in 2,500 different companies. Britain even has its own Motorsport Valley.

By Ms Hewitt's calculations, that makes it a "cluster" and the DTI likes clusters. They need to be nourished and protected so they can grow into bigger clusters and maybe even begat new baby clusters elsewhere some day.

So it was that 20 or so figures from the world of motorsport dragged themselves along to her department yesterday for the first motorsport round table. No one can quite explain why the round table needs to exist or what it hopes to achieve, other than to keep the industry in pole position and provide the headline writers with easy puns.

Needless to say, most of those sat at yesterday's round table were trade associations for whom initiatives such as Ms Hewitt's are the very reason for existence. Sir Jackie Stewart was there but otherwise there weren't too many movers and shakers to be found. No Formula One constructors. No Bernie Ecclestone. Perhaps he would have been politically incorrect and insisted on turning the conversation around to tobacco sponsorship or access roads to Silverstone built at extra cost to the taxpayers.

So what did the meeting actually decide? Well, it decided that there were too many people in attendance. The next one in the autumn will involve a smaller and more focussed group under the chairmanship of la Hewitt and someone from outside the industry. Wouldn't it be nice if the second meeting decided there was no need for a third? Fat chance of that. Ms Hewitt has hired a firm of management consultants to produce an in-depth study and the meter is already running. Vroom, vroom.

m.harrison@independent.co.uk