AS the sterling crisis came to a head in September the real economy
was going through a bad patch and the evidence from the Confederation of
British Industry suggests that there has been further slippage since
then.
The first concrete evidence that the economy was entering a period of
renewed weakness at the end of the third quarter emerged yesterday with
the publication of the industrial and manufacturing output figures for
September.
The official figures showed that manufacturing output dropped by 0.4%
in September, taking it down to its lowest level since January. In the
intervening months manufacturing output had been moving in a narrow
range with the trend slightly positive.
The September figures might have been a great deal worse. During the
month there was a sharp increase in motor vehicle output, mainly because
of a 50% increase in export production. But for this Central Statistical
Office officials estimate that manufacturing output would have fallen by
around 1%.
Iron and steel output declined 8% on the month, and output in the
mechanical and electrical engineering industries fell away from
relatively buoyant levels attained in August.
The three-month trend was not nearly so bad. Manufacturing output
dropped by 0.1% between the latest two quarters, suggesting that next
week's gross domestic product figures will show that the onshore economy
may have fallen slightly in the third quarter after its miniscule rise
in the second.
Against the third quarter of last year manufacturing output was 0.8%
down and is now 7.5% below its peak level in the second quarter of 1990.
The metals industries, including iron and steel, were hardest hit with
output down 1.9% between the latest two quarters and 4.8% lower than in
the third quarter of last year.
There are still positive signs in a number of sectors, such as other
manufacturing, where paper, printing, and publishing has been boosting
output, 0.3% higher between the latest two quarters and 1.8% above the
level of a year ago.
The severely depressed textiles, clothing, and footwear industries may
be over the worst with a 0.2% rise in output between the latest two
quarters and against the third quarter of 1991.
Even in engineering there was a rise of 0.1% between the second and
third quarters, though output was 1.9% lower than in the third quarter
of last year.
In other minerals and mineral products output fell by 0.2% in the
latest quarter and was 4.5% lower than in the third quarter of last
year. The chemicals industry shows respective declines of 0.6% and 2.3%.
On the yearly comparison the food, drink and tobacco industry is the
strongest performer with output up 2.3% in the year to the end of the
third quarter. But in the latest period the poor summer turned the
fortunes of the soft drinks industry, and overall food, drink, and
tobacco output declined by 0.7% between the second and third quarters.
Recovering well from the earlier maintenance schedules this year,
North Sea oil and gas production, which rose by 6.7% between the second
and third quarters, has saved the day for the economy. As a result,
broadly-based industrial production, which includes oil and gas, as well
as the energy and water industries, rose by 0.3% in September and was
0.6% higher in the third quarter than in the second. But it was the same
amount lower than in the third quarter of 1991.
On this basis economists are hoping for a small increase in total GDP
in the third quarter, in contrast to the declines in the previous three
quarters.
In the other energy industries, coal output fell by 4% between the
latest two quarters and was 10% lower than a year earlier, even before
the controversial programme of pit closures began.
Overall the Treasury is forecasting a 1% decline in manufacturing
output between last year and this, the same as for GDP. The process is
reversed next year with the Treasury pencilling in a 1% increase, much
gloomier than 1.75% average for the range of independent economists.
The Treasury would have known that manufacturing output was falling
away sharply at the end of the third quarter before Chancellor Lamont
delivered his Autumn Statement with its package of measures to boost the
weaker sectors of the economy.
The stock market showed disappointment yesterday that interest rates
had been cut by 1% rather than 2%. The City concluded that the next
reduction was some way off. It may depend on what the Bundesbank can do
before the end of the year. From now on cutting rates by full percentage
points would be likely to upset sterling, which yesterday held up quite
well as Lamont was seen to have taken no unnecessary risks at this stage
with his growth package.
The October inflation figures were pushed into the background by the
fall in manufacturing output and the continuing reaction to the Autumn
Statement.
It is too early for the recent sharp reduction in mortgage rates to
send the headline inflation rate plummeting and much too early for the
inflationary pressures arising from devaluation to start upsetting the
applecart.
For the third month in a row the annual rate of headline inflation
stuck on 3.6% as dearer petrol and some recovery in clothing and
footwear prices after the High Street sales were the main factors
pushing up the retail price index by 0.4% between September and October.
The Treasury's 1% to 4% target range for inflation relates to the
underlying rate, which excludes mortgage interest payments. Last month
this fell from September's 4% to 3.8%, its lowest level since March
1988.
Economists at James Capel detected further signs that service sector
inflation was continuing to decelerate. They calculate it fell from 6.9%
in September to 6.5% last month having peaked at 9.9% in April of last
year. Nevertheless inflation in service industries is still far too high
in relation to the economy as a whole.
NATIONAL Savings has reduced its interest rates following the
reduction in base rates announced in the Autumn Statement.
The current range of fixed-rate products have been withdrawn and
variable rates have been cut in line with the reduction in base rates to
7%.
The rate on index-linked Savings Certificates, which has remained
unchanged despite earlier base rate cuts, has now been reduced, with the
new sixth issue yielding 3.25% net plus inflation if held for five
years. This compares with 4.5% offered previously. The maximum holding
has been halved to #5000.
The new 40th issue of standard Savings Certificates will return 5.75%
net of tax compound over five years. Holders of matured certificates can
invest up to #10,000 in addition to the normal limit.
Series G Capital Bonds will offer 7.75% gross over five years and
series E Children's Bonds 7.85%. The new products will be on sale from
December 7. There will not be a replacement FIRST Option Bond for the
time being.
The new rate on the investment account will go down to 6.25% gross on
November 26 and on income bonds to 7% from December 26.
National Savings is still posing a formidable challenge to building
societies, increasing its net inflow of funds last month. This came to
#388m, up from #202m in September, when societies saw an outflow of
#264m. Including reinvested interest the contribution to Government
funding came to #525m.
Supported by a new press and television advertising campaign, the
gross intake was #867m, with the then highly-competitive index-linked
Savings Certificates proving the most popular, accounting for #224m.
FIRST Option Bonds sold #139m and fixed-interest Savings Certificates
#103m.
The movement has now contributed #3300m to the Government's coffers so
far this financial year, including #1100m of accrued interest.
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