Bill Jamieson: On a clear day you can see the storm brewing

The Beast from the East has already become a distant memory. Picture: Gareth Fuller/PA

How long ago the misery of the relentless cold of the opening months of the year now seems – a winter that kept us indoors and sent the economy into a tailspin.

Now comes news that the UK services sector reported its fastest rise in activity since last October. The Purchasing Managers’ Index (PMI) from IHS Markit/CIPS showed activity rose to 55.1 in June, up from 54. It follows better than expected growth in the UK construction sector for June, according to IHS Markit/CIPS, and also a modest increase for manufacturing during the same month.

And to cap this sunny outlook, no less than the Bank of England governor says he now has more confidence in the UK economy and that recent data, showing household spending and sentiment has “bounced back strongly” had given him “greater confidence” that weak first quarter growth “was largely due to the weather”.

Well, most of us had already guessed that – and noticed, too, that the weather had, well, changed.

But cheerful news, from the Bank of England? And from Mark Carney, a lugubrious governor who has seldom missed an opportunity to warn that Brexit could see us spiralling into a downturn? Such is his forecasting record over the past two years, many would treat the governor’s sunny optimism as good reason to fear the exact opposite: storms ahead!

An interest rise in the autumn, continuing chaos and confusion over Brexit and an escalating global trade war: it’s not hard to construct a scenario at odds with Carney’s sunny disposition.

To be fair, his speech at a Northern Powerhouse Summit in Newcastle last week was not all unalloyed sunshine. He also warned that a global trade war could dampen economic growth, and that “protectionist rhetoric” was rising and was now turning into action. “There are some, tentative signs,” he said, “that this more hostile and uncertain trading environment may be dampening activity.” He cited evidence from an IHS Markit/CIPS survey suggesting that global export orders and manufacturing output have fallen back from highs at the start of the year.

As if on cue, US tariffs on $34 billion (£25.7bn) of Chinese goods came into effect the following day, signalling the start of a trade war between the world’s two largest economies. China has retaliated to the imposition of a 25 per cent levy on various goods by imposing a similar 25 per cent tariff on 545 US products, with Beijing accusing the US of starting the “largest trade war in economic history”.

Until now, financial market reaction to the combination of central bank monetary tightening and an escalating protectionism has been remarkably sanguine. The FTSE-100 Index is still comfortably above 7,500 – some 10 per cent higher than in April, while the Dow Jones Industrial Average is still north of 24,000 – up 14 per cent on its level 12 months ago.

Storm clouds? What storm clouds?

But it is out of the clearest skies that the blackest clouds can suddenly bubble up. An interest rate rise this autumn would not be a “one-off” but likely to be the first of a series of hikes spaced out over the next two years as central bank monetary policy seeks a return to something like a historical “normal”.

Are we prepared? After years of rock-bottom interest rates, the debts of the UK’s listed companies have soared to a record high of £391bn, easily surpassing pre-crisis levels, according to the new annual Link Asset Services UK plc Debt Monitor. In the vice of the credit crunch, companies had cut their borrowings by a fifth in just two years. But since the low point in 2010-11 net debt has jumped by a staggering £159.6bn. Moreover, most of this increase (£122.6bn) has been in the past three years alone.

But it is on the Continent where concern is growing over a dramatic reversal in financial fortunes. In France, the Autorité des marchés financiers (AMF), the country’s stock market regulator and the body responsible for safeguarding investments and in maintaining orderly financial markets, says “the number one risk for 2018 is a brutal correction of stock prices”. Inflated asset markets have so far weathered the first phase of monetary tightening, but pressure is building and any number of geo-political triggers – from an Italian confrontation with the European Commission to further US tariffs on EU goods – could set off a scramble out of shares.

Separately the heads of Germany’s respected IFO Institute has warned that the European Central Bank has little ammunition in the armoury to deal  with a financial emergency. “The Eurozone,” he told an economic conference in Munich last week, “remains highly vulnerable to the next downturn. If nothing is done, it is going to be a very negative scenario, with massive bail-outs and massive costs for Germany.

“Italy, Portugal, Spain and France have no fiscal space, or almost none, and if we go into the next crisis with debt levels anywhere near the current levels this is going to end in something close to Greece.” The Japanese option of letting debt levels go to 200 per cent of GDP, he added, is not on.

A cloudless sky? Hardly.

The World Cup and  Barnett consequentials

According to the Centre for Retail Research, the UK economy has already benefited from World Cup spending reckoned to be worth £1bn. Estimates have climbed as high as £2.7bn were England to go “all the way”.

I do hope the Scottish Government is keeping tabs. Should it not ask the UK Treasury for a share of this celebratory spend down south under the Barnett Formula – a “Barnett consequential”? According to CRR Director Professor Joshua Bamfield, every goal scored by England has been worth £165.3m in extra business to England’s retailers and £33.2 million for pubs, hotels and restaurants.

Equally, should an England defeat not be grounds for compensation payment – for all the beer and barbecue sausages bought but not consumed? A Scottish economic recovery hangs on the tiniest thread.