Outlook: Economic blues
Wednesday 28 April 1999
As yesterday's CBI survey showed, over the first four months of 1999, manufacturing jobs were disappearing at their fastest rate for six years. Things don't look too much better going forward - manufacturers expect to continue shedding jobs over the next four months, albeit at a marginally slower pace.
Taken as whole, manufacturing now accounts for just 20 per cent of UK output, compared with 25 per cent at the beginning of the decade. And looking ahead, there is little reason to expect any reversal of the sector's well-established of decline.
What does all this mean for policy? Clearly, the smaller the manufacturing sector becomes, the less able it is to exert influence - either directly or indirectly - over the level of interest and exchange rates.
In this sense, the decline of UK manufacturing has become a vicious downward spiral. Interest rate policy in this country is largely determined by our relatively large, and relatively buoyant, services sector. Manufacturers have for many months been stuck with an interest rate - and with an exchange rate - that is far too high for their own good and is primarily intended to curb a services boom.
The Bank of England's interest rate stance has merely served to catalyse the pace of manufacturing decline, and, in turn, to diminish further manufacturers' influence over policy.
Given that manufacturing is in the main - although not entirely - based in the north, and that services - in particular Britain's rapidly growing financial services sector- tend to be based in the south, the effect of all this will be to widen the north-south divide.
Eddie George, the Bank of England governor, strongly maintains that he was misquoted by a northern regional newspaper which reported him as saying that northern jobs were a price worth paying for keeping inflation down in the south.
Unfortunately, that is the truth of how the Bank of England interest rate policy works. Indeed, if the Bank is to meet successfully the Government's inflation target, it is the only way its interest rate policy can work. If Eddie George thinks he gets flak from manufacturers in the North-east now, he should just give it a year or two.
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