Light at the end of the recession tunnel

Published on Monday 3 August 2009 22:05

BRITAIN'S worst recession of the post-war era looks as good as over. Yesterday saw huge surges in the pound and on the stock market.

This does not mark the end of bad news on the economy. But it has fair claim to go down as the day we saw, for the first time, clear white light at the end of the darkest tunnel in decades.

Both the pound and the FTSE 100 index of top UK shares hit their highest levels since last October on growing hopes for an economic recovery.

'Customers of bailed-out banks are moving their accounts to us,' claims HSBC's Scotland chief - read this story here

From the United States, Europe and China came further encouraging news that economies across the world may now be on course for a lift, while the price of oil climbed above $71 a barrel.

Key drivers for the pound and UK shares yesterday were better than expected economic data and results from banking giants Barclays and HSBC, suggesting they may be at or past the worst of massive bad debt provisioning.

The pound scrambled up to $1.6965 against the dollar at one point – its highest for ten months – taking the rally since January to 25 per cent. The currency also hit a one-month high against the euro of 84.63p.

The FTSE 100 index ended at its highest since early last October, at 4,682.46, up 74 points or 1.6 per cent on the day. It has now rallied an astonishing 32 per cent since the black days of early March.

These advances have been fuelled by brighter news from Britain's beleaguered manufacturing sector.

The closely watched Purchasing Managers' Index for manufacturing, from the Chartered Institute of Purchasing and Supply (CIPS), climbed above 50 in July for the first time in 15 months. A reading of more than 50 indicates a return to growth.

Particularly encouraging is that the new-orders balance is at its highest level in two years.

CIPS chief executive David Noble said: "The manufacturing sector has clearly pulled out of the nosedive it was in earlier this year and is no longer plummeting".

Charles Davis, of the Centre for Economics and Business Research, said: "While manufacturing activity was expected to edge up, today's larger than expected jump is a sign that there could be growth in the third quarter of 2009 as the inventory cycle turns, following the 3.2 per cent contraction in the economy over the first two quarters."

Howard Archer, European economist at Global Insight, agreed. He said: "The survey showed both output and new orders expanding at the fastest rate since the end of 2007, and at a pretty fair clip. The orders-to-inventories ratio rose to a three-year high."

The turn-up in manufacturing follows the return to positive territory of the service sector Purchasing Managers' Index in May.

The survey comes hard on the heels of the CBI's Trends Survey for small and medium-sized businesses earlier this week. This showed a slowdown in the pace of decline in business sentiment, with medium-sized firms reporting a marginal increase in confidence for the first time since April 2007.

While unemployment is set to rise further in Britain, Europe and the US well into next year, growing evidence that the world's biggest economies are turning the corner should provide a big boost to confidence. That, in turn, should help encourage companies to invest for the upturn and slow the rate of increase in unemployment.

HSBC, Europe's biggest bank by market value, posted first-half net profits of $3.35 billion (1.97bn) – a 57 per cent fall from a year ago, but better than expected. HSBC chairman Stephen Green said: "It may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets."

Barclays' earnings for the same period came in at 1.89bn, a 10 per cent rise that was slightly under expectations but still accepted by investors as respectable given the difficult economic backdrop.

Shares in Barclays jumped 20.25p, or 6.7 per cent, to 322.55p on the day, while HSBC rose 4.9 per cent and Royal Bank of Scotland picked up 3.5 per cent to 46.4. Lloyds Banking Group limped gamely behind with a 0.29 per cent rise to 85.25p. Both Lloyds and RBS are due to report results later this week.

Bank analysts are united in warning of bad news still to come and of a long tail of bad and doubtful debt provisioning.

But Richard Hunter, head of UK equities at Hargreaves Lansdowne, said: "In terms of the economic figures that are coming out, both in the US and the UK, it is increasingly pointing towards the fact that we are probably past the worst of the recession on both sides of the pond."

In the US, keenly awaited data from the Institute for Supply Management (ISM) showed that, while manufacturing activity had slowed in July, it did so at the slowest pace in nearly a year. The ISM said its manufacturing index had risen to a better than expected 48.9, from 44.8 in June.

At the same time, the US commerce department reported a jump in residential building during June that lifted overall construction spending for the second time in three months. Analysts had expected a 0.5 per cent drop.

The surveys drove Wall Street higher, with the S&P 500 Index smashing through the 1,000 mark.

Finally, a global index compiled by investment bank JP Morgan showed worldwide factory business activity had stabilised last month as new orders and output recovered to levels not seen in well over a year.

The global index climbed to a 14-month high of 50.0 in July from 47.0 in June. The index had spent 13 months below the 50 mark that divides growth from contraction.

Now we're worth only 6.95 trillion

THE total value of the UK has fallen for the first time since 1992, official figures showed yesterday.

The Office for National Statistics (ONS) report, which adds up the value of buildings, roads and financial assets among other things, said the UK was worth 6.95 trillion at the end of 2008, down 177 billion, or 2 per cent, on a year earlier.

Housing continued to be the most valuable asset, with a total value of 3.92tn, but the fall in property prices over the last year meant this was down 9 per cent on the previous year. Within this, some 3.69tn belonged to households and non-profit organisations. The liabilities of financial firms and central government were calculated at 112bn and 261bn respectively.

The cost of replacing all of the country's assets in their current condition would be about 3.01tn at current prices, the ONS report said.

The survey also estimated total depreciation of 151bn in 2008, of which plant and machinery accounted for 33 per cent of the figure.

The report – Capital Stocks, Capital Consumption and Non-Financial Balance Sheets – also showed that the value of non-financial assets increased from 533bn in 1948 to 2.88tn in 2008.

"Masters of the universe" back in spotlight

THE "Masters of the Universe" of the investment banking world are behind the 6 billion combined profit posted yesterday by Barclays and HSBC.

Unpalatable though it may be to a public suffering from a crisis that began with the unwinding of the sector's disastrous forays in boom years, investment banking business has surged.

Investment banks trade everything from company and government bonds to commodities, currencies, shares and derivatives.

But the huge push for financing by cash-strapped companies needing to trade through recession has led to a surge in commission fees for the banks.

Barclays – which doubled profits at its Barclays Capital investment banking and trading wing – saw income from underwriting and advisory work soar to more than 1bn in the first half of 2009. And HSBC's global banking and markets operation was the only division where pre-tax profits did not fall in the first half of the year.

In September, The Scotsman's Bill Jamieson rightly pointed the finger at the so-called "Masters of the Universe" for driving the world economy into crisis. Now, ironically, it is the banks that appear to be leading the way to recovery.