UK Industrial Sector: Sharp Improvement- So What?

UK industrial orders as reported by the CBI survey (Confederation of British Industry) are up sharply cutting their negative reading to -12 in December (Merry Christmas!) from -21 in November. This jump still leaves the series weak in only the 66th percentile of its historic queue implying that orders are better than this 33% of the time. So the industrial sector is back to a top one-third position which is not great except by recent comparison.

But let's be skeptics and withhold judgment on this improvement this time. Orders were last stronger at a '-8' reading in September of this year just three short months ago. The sharp improvement at that time (even sharper than this improvement) proved to be temporary. The chart at the top shows us that this sort of saw-tooth pattern in orders has been common in this cycle and while the orders series has rebounded sharply it is still only at the top of what would appear to still be a downward-sloping channel. Despite the sharp gain this month it would be premature to call this a break-out month.

Moreover the volume of output expected in the three months ahead is a rather weak reading. Statistically it lies in the bottom 57% of its historic queue implying that output expectations are better than this about 43% of the time. This is a decidedly weak assessment by survey participants.

Export orders are moderate weak as well, better than their current level 41% of the time.

The UK is caught up in all the hoopla over the e-Zone and EU. The statement about how Britain needs to reassess its position or role in the EU and the hostilities that have shot back and forth cannot be particularly encouraging for British industry which to some extent must wonder what lies ahead. The EU is undergoing some growing pains as it tries to sort out its relationships in the midst of various crises.

The UK finds itself with some very different priorities from other EU members. The UK is not a member of the single-currency arrangement of the Zone. Yet it does have EU status and special opt-out status from the e-Zone and does particulate in decision-making.

The UK's interests as far as the financial transactions tax is concerned are simply not being respected as the rest of the Zone has pushed for this rule to raise revenue and to discipline bankers. But the UK depends on this sector far more than do other EU members. London is the world's major financial sector. The UK's abhorrence to join the EU in its zeal to tax bankers is understandable. The EU inability to see the UK's interests in this matter are decidedly ethnocentric, divisive and telling.

For any economic amalgamation to work of course the structure must be right and the commercial and financial sector arrangements must mesh and be flexible. But members also must be aware of the needs of other members. To impose a policy that would so gravely injure the UK economy and think it is fine because a majority of Zone members want it, is not a very good assessment of political conditions in the EU.

To some the UK looks pretty stubborn to be bucking the crowd in EU on this issue, on the other hand, the stubbornness is wrought of the UKs deep economic interests in this matter and reflects concerns that I do not think are exaggerated. This issue which is not some new conflict is simply a good example of the sorts of things that continue to fester and tear the Zone/EU apart. Just today a German political leader, Rainer Bruederle, a parliamentary leader of the Free Democrats (FDP) who share power with Merkel's conservatives, was ranting about how the UK could cause the EU to disintegrate because its has 'its own agenda.' And he mentioned this financial transactions tax specifically.

It is true that if the EU does not find some way to allow for structural differences to be preserved and for member differences to be accommodated the Zone will probably disintegrate as well. It is one thing to tell the Greeks that their profligate ways and failure to collect taxes and reliance on external lending must come to an end. It's another to tell the British that you plan actions that will squash a substantial part of the UK economy that has been a vital part of it for hundreds of years.

I think British industry is caught in the Middle of these snafus as well as mired in a zone of EMU weakness. The UK is ill equipped to lead the Zone into growth even though there are signs that the UK economy is doing better. The Zone is a welter of different trends, few of them good. The UK is almost certainly destined to shadow EMU growth rates, which is a bad outcome given the way things are going. News of UK economic improvement should be viewed with caution until the Zone clearly turns the corner, and of course, UK-EU political considerations need to be closely watched.