The British Chambers of Commerce report today that orders, investment and demand for labour all fell heavily in the last quarter of 2008. This will be no surprise to many people reading this. These declines are continuing in the first quarter of 2009. It is the inevitable result of the monetary policy mistakes of a year or so ago, and the weakness of the banking system.
The government is now rolling out a couple of schemes that borrow from ideas put forward by the Opposition – a loan guarantee scheme, and a subsidy scheme for employers taking on new workers. Both schemes can be helpful, but both need careful work on the small print. If you are offering a subsidy for a new hiring you need to make sure you are not encouraging an old firing at the same time. If you are offering a guarantee to banks for offering credit, you need to leave the banks sufficiently on risk if the loan goes wrong so the banks do not lose interest in assessing risk properly.
As the Chambers of Commerce survey should remind us, these two subsidy schemes are not of themselves going to turn round the plunging economy. Companies need orders. They will not be hiring extra people if their order books continue to fall by anything between 5 and 75%. We heard recently that JCB are currently producing just 25% of the volume they were making a year ago. No wonder they had to sack another 684 people. Companies do need overdrafts and short term loans to be able to pay the wages and pay their suppliers, but they cannot go on doing this on borrowed money if the demand is not there to justify the employee numbers and the material and component stocks.
We have got used to importing lots of good value products from China, India and other parts of the Far East. Many of these goods are produced by workers probably earning around one fifth of workers in the UK. Some of these workers are probably being sacked as we speak, as there is a sharp contraction of global demand for Chinese manufactures. They will enjoy little of the benefits and safety net that workers fortunately enjoy in the UK. These hard working and successful exporters are now experiencing more grief than we are, as they shed jobs more quickly in their manufacturing heartlands and leave people without a western style welfare fall back. The Chinese as a whole continue to save massively, and kindly invest some of their savings in UK and US government bonds enabling those governments to buy their products by lending them the money.
Recently the pound has nosedived. An importer told me the other day that he could go on offering low prices for imports for a bit longer, as he still had some stock bought at better prices, and had some currency cover in place. However, in a few months time this will have run out. Then the UK economy is open to the full shock of a 25% increase in import prices from the collapse of the pound. The government hopes that this will not just choke off demand for imports, but will kick start home output at better prices to replace the lost imports. The issue is will it?
Normally such a big price movement would change things dramatically. I hope there will be some positive change this time as well. However, we need to factor in the possibility that China(and other low price producers) will actually cut their wages and do whatever it takes to lower their prices again. UK producers will find it difficult to obtain the money, the permits and the facilities to start producing all the many products we have got used to relying on China to deliver. Prices and currency point to big scale import substitution, but UK companies are badly weakened by low or no profits, poor access to finance, and regulatory complications to expand capacity to drive out the imports.
There are no easy solutions to any of this. We do need a drive to substitute home made product for overseas, and need to get used to mending and improving using local labour rather than automatically reaching for the order form for a complete new overseas product. The currency move will push people in this direction. The danger is our companies are too weakened to respond as vigorously as we would like. In that case we will simply end up buying less and having fewer modern and working items, and will have missed another opportunity to strengthen manufacturing in the UK.
The government has in the last week admitted that its measures last year to sort out the banks have not done the job. I hope they will now make the changes to the regulatory systeam it is going to need to get the banks into a position where they can lend again.