Bill Jamieson: Plunging economy makes the case for halving rates

Published on Monday 1 December 2008 23:36

WE KNEW it was going to be bad. Just how bad is already looking a lot worse than we have bargained for. Latest pointers yesterday leave in no doubt that we are in the sharpest and most severe recession in living memory. There are now huge falls in manufacturing output, exports, order books, mortgage lending and credit availability.

The appalling data should leave the Bank of England's monetary policy committee in no doubt that a full one percentage point cut in interest rates to 2 per cent is the minimum it should announce this Thursday. Indeed, a drop to 1.5 per cent would be more appropriate.

We are now in a battle to halt this already severe downturn from turning into an epochal depression.

UK plc is heading towards an economic Year Zero – straight into a wall of failures, falling orders and foreclosures that will ask searching questions about the sustainability of large swathes of the economy in coming months.

How much of the economy will survive to experience an upturn at the end of next year?

The four most vulnerable sectors are financial and business services; housebuilding and construction; manufacturing industry, and retail. And prospects in all four are dire. Tens of thousands of firms large and small and are likely to go under.

When I listened at the weekend to the chairman of a well-known Scottish manufacturing company tell me that his order book had collapsed worldwide and that competitors were holding fire sales to move stock, it was hard to take in the scale and seriousness of the slump he was describing.

The latest Purchasing Managers Index for manufacturing leaves no room for doubt.

The index shows a collapse in November to the lowest since the survey began in 1991. The series for output, new orders, quantity of purchases and export orders are also at record lows.

"UK manufacturing activity," says economist Howard Archer of Global Insight, "has fallen off a large cliff. The November survey is absolutely terrible, with extreme weakness wherever you look."

The bleak message was underscored by a dismal survey from the Engineering Employers' Federation, which warns of 90,000 jobs being lost in manufacturing. Steve Radley, the EEF's chief economist, says the organisation would not normally support state aid for industry, but the situation is now so critical for many companies that there is no alternative. "Immediate government action is needed and ministers should look at some form of state guarantee for lending and access for credit insurance," he said.

For the housebuilding and construction sector the collapse is intensifying. Mortgage approvals for house purchase fell to just 32,000 in October, matching the record low seen in August. And the growth in personal borrowing continues to plunge.

Annualised lending growth to households and non-financial businesses has slumped from 11.5 per cent to 6.1 per cent, while bank assets continue to fall and credit availability shrinks. According to accountants BDO Stoy Hayward, the number of business bankruptcies next year is set to jump by almost a half to 32,300.

Similar miserable data on manufacturing worldwide, with a key US measure of manufacturing activity falling to a 26-year low, sent stock markets plunging yesterday, crushing hopes last week that a corner of sorts had been turned. Instead we are having to brace ourselves for a recession deeper and more prolonged than even bombed-out stock market valuations have been discounting. And the fresh falls in sterling point to growing worries about the sustainability of the UK finances.

Did someone say an election next year? Or a national government?