Industry is hurting, but it's only one side of the story
Diane Coyle on why the MPC cannot please everybody
Friday 10 April 1998
The extent of lobbying of MPs, ministers and officials that has been taking place during the past few weeks is not to be underestimated, and the Chancellor deserves a special bravery award for standing by his determination to steer policy for the long-term stability of the economy.
It will be some time before we know whether the MPC's members wobbled this week in the face of the industrial onslaught, with a six-week delay before publication of the minutes of the latest meeting. They will shed fascinating insight into how much the committee has weighed considerations of growth in the export-reliant parts of the economy against the inflation target.
Most Bank-watchers believe the MPC remained split down the middle over a difficult and "finely balanced" decision as to whether rates should rise or remain unchanged. The next tactic from the industry lobby, however, is to start arguing for a reduction in interest rates. The weaker the figures for manufacturing output become month by month, the more voices will call for a rate cut, no matter how much the rest of the economy is decelerating.
Yet, hard as it might be to believe from the uproar, there is no serious problem with the general macro-management of the economy. Kenneth Clarke should have raised interest rates a bit more before the election last May, so the Bank has had to raise them more since. But by past standards, both fiscal and monetary policy are looking about right.
The Government's finances are heading towards balance at an acceptable pace and squeezing demand as much as can be reasonably expected from elected politicians voted in on a dual pledge not to raise taxes while improving public services. Loan and mortgage costs are also pretty close to where they ought to be; nobody is seriously arguing for a big rise - or fall - in their level, only for a quarter or half-point change.
Getting it about right is the best that can be expected in the face of enormous uncertainties about economic prospects, and better than we have often managed in the past in this country.
Rather, the problem is one of "balance" or the mixed fortunes of different bits of the economy. This has been exacerbated by the strong pound, but not created by it. Manufacturing is in a steady decline as a share of the economy, and has been for at least 25 years.
Managing decline is no fun. And within manufacturing, some industries have proved much less able than others to adjust to the switch to high value-added production necessary to survive. While parts of engineering and food manufacture have generally coped well, textiles and metal bashing see extinction looming. Every episode of sterling strength wipes out a bit more of the production base in these failing sectors. Who can blame them for their lobbying?
A detailed new report from Paribas, the investment bank, sheds some light on which parts have the most reason to complain. In the aggregate, the figures show that times are getting harder for manufacturers - but are not yet excruciating.
Production growth has slowed since September and is now flat. Export margins have shed their post-September 1992 gains because of falling export prices, but total profit margins in manufacturing have so far continued to increase. Employment has been rising too, according to the latest data.
The authors, Roger Beedell and Corey Miller, are actually very pessimistic about prospects for industry in the aggregate. But the detail shows widely varying performances. Two big sectors - food, drink and tobacco, and engineering - are still growing at a reasonable pace, the latter mainly thanks to aerospace and transport equipment.
On the other hand, production in textiles, clothing and footwear, basic metals and wood products is falling at an uncomfortable clip. The first chart shows the gap that has emerged in production performance.
The Paribas analysis also shows that different sectors vary in their exposure to a slowdown in exports to Asia as a result of the troubles there. For example, more than a third of the tobacco industry's exports go to the region, but it accounts for only 5 per cent of the exports of rubber and plastics.
The textiles and clothing sector is vulnerable to import competition as a result of the fall in the Asian currencies against the pound, but it also gets a boost from cheaper imports of its materials.
All in all, profit margins within manufacturing span a wide spectrum. The real pain at present is being suffered by the clothing and textile industry and by electrical equipment makers - both in different ways suffering from greater overseas competition.
The former simply has too many competitors in emerging economies with much cheaper labour costs. Its decline is probably terminal. The latter is seeing over-capacity in some products, such as computer components, due to heavy investment in a small number of other countries driving down prices. Investment cycles can be uncomfortably long but they eventually work themselves out.
Weaker manufacturing will of course eventually have an impact on the service industries as well. It is likely to spill over first into retailing and transport. The Paribas research suggests that other services are substantially less sensitive to a downturn in manufacturing, with an overall effect of an eventual 0.4 per cent drop in services output for every 1 per cent drop in manufacturing output.
But with different services also growing at vastly different rates, from booming business services, finance and IT to the rather more subdued retailing and no-growth public sector services, the Bank of England has no choice but to look at the averages. This will suit some businesses a lot more than others.
The trouble is that in the policy debate the booming sectors are not bothering to demand higher interest rates to cool down their pace of activity. They are rather enjoying their boom. Only one side of the argument is being presented on the public stage - and what a melodrama it is turning out to be.
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