Martin Flanagan: Stark contrast with China bodes badly for UK's hopes of recovery

Published on Tuesday 31 August 2010 22:43

CHINA's rebounding, Britain looks bound in. As far as manufacturing prospects go that is, with sentiment darkening in the UK yesterday but offset by an apparent second wind for the Chinese economic locomotive.

The United States may still be the weather-vane for the way the world's economic prospects are blowing, but China (and India, to a lesser extent, with just 8 per cent economic growth last year) are increasingly the go-to nations for macro-economic reassurance that all is not dire.

We clearly need the UK to pick up far more than the latest data showed yesterday. But the macro-economic picture worldwide, which affects us all in the long-run, depends on the continued barnstorming performance by the likes of China.

The contrast yesterday was stark. The latest manufacturing data in the UK showed a slowdown in activity in August from July, and a marked slowdown in new orders, according to the Markit/Chartered Institute of Purchasing and Supply purchasing managers index (PMI).

Alarm bells were set ringing in the City and possibly Whitehall by the sharp fall in the PMI new orders index to 52 from 58.5 in July.

Although any figure over 50 indicates growth, that is a heck of a monthly fall - the biggest for six years - in an index which often moves in terms of a percentage point or two, or even just fractions of a per cent.

The UK's August manufacturing activity growth came in at 54.3 against 56.9 the previous month, not quite as worrying as the orders' figures but still depressing to read.

UK exports held up a bit (ironically, with each bit of bad news the pound softens a bit and makes our exports just that bit more competitive), but domestic demand for our smokestack industries was sluggish.

All the pundits said the much stronger than expected 1.2 per cent growth in the UK economy in the second trading quarter was an aberration that could not be sustained, and these latest manufacturing figures suggest the same (alongside an equally depressing survey from the Confederation of British Industry on our services industry this morning

We have yet to face the huge public spending cuts in the UK, and some jitters had returned to global financial markets recently.

The Footsie bounded up 21 per cent last year as the UK stock market anticipated the UK's move out of recession. But the index was off 3.4 per cent at the start of play yesterday on where it opened the year due to the new uncertainties about the global economy.

However, 2.7 per cent of this year's fall was recovered by the close, not least because of the better news on Chinese manufacturing.That country's purchasing managers' manufacturing index rose to 51.7 in August from a 17-month low of 51.2 in July, rebounding partly from the constraints imposed on the sector by a crackdown by the Chinese authorities on a credit boom for companies and consumers.

More importantly, China's new manufacturing orders index rose sharply to 53.1 from 50.9, showing the locomotive remains on the tracks.

The better news from China was not the only factor (there was also better US and Australian data) but it was a big component in the stiffening of the Footsie. The index is now less than 50 points short of where it started the year.

And the Chinese link is inextricable to the blue-chip index's fortunes. Mining is a key swing stock in the Footsie's fortunes (so were banks at one stage but let's not go there now), and six of the top ten risers in the index yesterday were miners.

They prosper when they know the Chinese factories will still hunger for their base metals, and the likes of Kazakhmys, Xstrata, Rio Tinto, Lonmin and Anglo-American all saw their shares jump between 5 and 7 per cent on the day.

Wall Street was also 2 per cent ahead at one stage, while the Paris market closed up nearly 4 per cent and Frankfurt nearly 3 per cent, all partly through looking east.

Yesterday was a clear reminder that both macro-economic sentiment and the health of financial markets looks pretty much joined at the hip at the minute to China's economic strength.

Domestic UK data will continue to give us snapshots of how our sluggish domestic recovery is going, and what we saw from manufacturing and services yesterday suggests we should not hold our breath for anything exciting on that front.

Slow and steady does it is probably the best we can hope for, particularly with the aforesaid austerity programme about to kick in this autumn. That should really put our private sector-led recovery hopes to the test.

Equally, we remain in thrall like most of the western hemisphere to the fortunes of the US, and stateside economic shocks. But China's voracious manufacturing demand will see its data increasingly pored over by western economists with self-interested concern rather than academic curiosity at an economic phenomenon.