Bill Jamieson: Revolt against despair to escape the doldrums

Economists fear the worst, but we could still be in for a shock. Picture: Getty/iStockphoto

It is not just the short-term apprehension over a trade and supply disruption in the immediate aftermath of a 31 October “no deal”.

It is the long-term damage inflicted by a prolonged confidence corrosion: the cancelling of business investment and shelving of projects because so much has been so uncertain – and for so long.

The disruption of an early general election and the possibility of a change of government is of immediate business concern. But this draining of confidence will cast a long shadow. It will impact on economic performance for years.

The immediate impact is seen in labour retention or hiring in preference to longer-term business investment, technology uplift and enhancement and improvements in productivity. It also inhibits product development, entry to new markets and willingness to export.

I set out here clear evidence of the immediate damage being inflicted. Little wonder it is tempting to give up in despair. On authoritative forecasts, growth is already set to fade away to zero this autumn. This will itself compound the damage to business morale and will tilt us close to recession, if not drive us fully in.

Latest purchasing managers’ survey reports are uniformly dismal. Construction activity contracted in June at the fastest rate since April 2009, with declines across the housebuilding, civil engineering and commercial sectors. New orders falling at the sharpest rate for 10 years and for a third month in a row does not bode well for construction activity in the near term at least.

Economic, political and Brexit uncertainties, says EY Item Club economist Howard Archer, are influencing the “wait and see” approaches adopted by many companies, leading to some projects being delayed. Greater risk aversion was also reported to be affecting the residential construction sector.

The manufacturing sector struggled in June, suffering a hangover from the substantial boost it had gained from stockpiling in the first quarter. High stock levels are weighing on output and have also deterred some companies from placing new orders, while foreign demand is under pressure from a weakened global economic environment.

The manufacturing PMI showed activity contracting for a second month running in June and at a 76-month low. Output contracted at the sharpest rate since October 2012 while a second successive and appreciable fall in new orders does little to inspire confidence of any turnaround in the manufacturing sector’s fortunes.

A weakened services report completed a miserable set of June PMI surveys. Worryingly for near-term prospects, new business contracted slightly (the fifth decline in the past six months) while there was also a further running down in backlogs of work. Sluggish domestic economic activity and increased risk aversion among companies amid political and ongoing Brexit uncertainties were reported to be hampering new business.

Overall, says Archer, the June set of purchasing managers’ surveys “fuel our belief that the economy likely contracted 0.2 per cent quarter-on-quarter in the second quarter” and “reinforce our belief that the Bank of England will not be raising interest rates any time soon. Indeed the surveys will likely fuel growing market belief that the Bank’s next move could actually be to cut interest rates.”

And Oxford Economics was no less downbeat: “Given the statistical ‘funnies’ at work in the first quarter of the year, which boosted the measured performance of the economy,” it said, “some payback in Q2 was to be expected. But the breadth of weakness revealed by June’s CIPS surveys (and those of the second quarter in general) pointed to more deep-rooted headwinds.”

So to what can we look forward? Only this: there is a limit to how severe and how long such confidence corrosion and miserabilism can prevail before revulsion sets in. The forces driving us to despair will give way in time to a backlash and will feed the forces that will compel a radical change of political and economic direction.

Meanwhile there is evidence of continuing resilience and growth in the tech sector – evidence of how innovation and advances in digital technology continue in the face of economic and political headwinds.

A second quarter survey of confidence levels among UK tech startups is fractionally higher than three months ago. The survey of more than 100 business leaders within early-stage, UK-based technology companies found that 80 per cent of tech startups are “confident” (41 per cent) or “very confident” (39 per cent) about their growth prospects for the coming 12 months – 1 per cent higher than in Q1 2019

However, in the next year, only 73 per cent of tech startups plan to hire more staff (18 per cent lower than in Q1 2019), and just 59 per cent intend to raise finance (minus seven per cent); 70 per cent plan to expand into new territories (up three per cent) according to the survey by digital business adviser Studio Graphene.

The downturn in the global economic cycle we can do little about. But we know from economic history that cycles turn – such is their nature. However, we cannot reliably predict when such turning points occur or their strength.

And this current domestic downturn cannot be compared to an orthodox business cycle: it has been in large part caused by a political failure – one of the most severe for a century.

There seems no immediate likelihood of breakout. But, here, too, there is a political cycle, one that compels forces for break-out and change, however remote they may presently appear. Were this not so, we would still be locked in disputes over the Boer War and Imperial Preference.

The deeper the slump in confidence, the more likely in time will be a cultural, political – and economic – reaction. The coming autumn is set to see an intensification of political turmoil and chaos. But it could also prove a catalyst for a more deep-seated political and economic shift.