It's official - the economy is in trouble
With manufacturing on the brink of recession and many other sectors in a slump, even the boom in the City is beginning to cool off
Sunday 23 August 1998
The ONS figures showed that the economy grew at an annual rate of 2.6 per cent in the second quarter, down from a peak of 3.5 per cent in the third quarter last year.
The figures further confirmed that the manufacturing sector is, indeed, teetering on the brink of recession. Manufacturing shrank at an annual rate of 0.1 per cent during the second quarter.
If it shrinks in the third quarter it will, technically, be in recession.
Service industries, in contrast, grew at an annual rate of 3.6 per cent in the second quarter. "The City and telecoms are booming," said Barclays Capital UK economist Nick Vaughan. "But almost everyone else is in trouble."
Mr Vaughan believes the economy will bottom out next year just short of recession. He is forecasting the economy will grow 1.3 per cent in 1999. This is more pessimistic than the current Treasury forecast, which stands at 2 per cent.
Below is Mr Vaughan's sector by sector thumb-nail sketch of the economy. Graphs indicate the growth in each sector between the third quarter of 1997 - the peak of the current economic cycle - to 30 June.
This sector of the economy comprises the City, which is booming in spite of the slowdown in the economy as a whole. But even here things are cooling off. In the first quarter of the year average earnings were growing 13 per cent. This was the result of bonuses and the like. Those average earnings collapsed to 3 per cent in the second quarter.
This is the North Sea oil and gas sector, which is erratic. Without the upsurge in growthhere the economy would have been significantly worse. The upsurge is unlikely to continue. A Royal Bank of Scotland survey shows that revenues coming out of the North Sea are now at their lowest level since January 1983.
This is the telecoms sector, the internet and all that. But even this sector is coming off. It's also the transport sector and it indicates that fewer goods are being shipped.
This sector is way off. Its performance is worse than the economy as a whole. It shows how the corporate sector is thinking because hotel bookings are driven by companies. Hotel bookings are all about conferencing today. The graph here shows a sharp slide in corporate confidence.
Like North Sea oil and gas, this is an erratic sector. The use of utilities is driven by the weather. The improvement in this sector between the first and second quarter was another factor disguising how poorly the economy is performing overall.
There is a lot of added value in this sector. It's all about high-end machine-tooling and computer-assisted design. The numbers show that even this sector is coming under pressure as a result of the strong pound. The high profit margins, which initially protected it from sterling's strength and the Asian financial crisis, are gradually being eaten away.
This is the commodity chemicals business - people shipping tonnes of industrial chemicals, not lots of little units. Very thin margins. Think of ICI. The upsurge in the second quarter is surprising. I can't explain it.
A real collapse - fell by 2.6 per cent in the quarter. Housing starts were way off. Private housing starts in the three months to June were unchanged on a year earlier, but at the beginning of 1997 they were up 30 per cent. Homebuilders aren't stupid. They know that all the rises in interest rates are bound to undercut demand.
More decline. It's quite apparent that consumers are spending less.
These are the metal bashers. Nothing sophisticated; no added value. Orders of a hundred thousand nuts and bolts. British Steel. There has been a modest recovery - it's another mystery.
This is the coal industry - fuel industry. There's less demand for fuel. This is consistent with the picture of slowdown in the economy overall.
This sector is in a slump. Part of the problem is Asia. Thirty- eight per cent of textiles produced here are exported; 44 per cent of clothes as well. Nobody in Hong Kong is buying Saville Row shirts anymore. The UK can't compete with the Asians and their devalued currencies.
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