We are into the summer doldrums. As we expected, investors are asking themselves what happens when the quantitative easing money runs out? Commodity speculators are taking some money out of markets, aware of how far ahead of events in the real economy commodity markets have moved. We should expect share investors in the advanced economies to also start to query the delay in recovery in turnover and profits.
In the UK the British Chamber of Commerce survey this morning contains the good news that confidence levels have risen sharply from the lows of recent quarters. It would be unwise to break open champagne, as we still cannot afford the imports.
The survey also shows that “almost all the key balances remain in negative territory, and most balances are still weak by historical standards”. The net balance for home sales for manufacturing did rise by 18 points, but it is still at a heavily negative minus 37%. Worse still, the balance for manufacturers’ home orders, what matters for future turnover, rose 15 points to rest at an equally heavily negative minus 37%.
Businesses need to generate cash to survive, and to have money to invest in the future. One of the worst figures in the survey was the one for manufacturing cashflow. At minus 32% it is at “the lowest level since records are available”.
This survey shows that prospects and confidence levels have moved from dire to very worrying. After a long period of sharp downturn figures start to look better by comparison to very weak figures. That is not the same as a strong recovery.
The BCC are saying that unemployment goes on rising, hitting future demand. They report what their members see, which is too few orders and too little cash coming into their businesses. It is good they also report what their members feel, and they are feeling a bit more optimistic. We need that optimism to translate into more orders.
We remain negative about UK shares and government bonds. The UK has not done enough to sort out the massive imbalances in its economy. The banks are still weakened by the credit crunch, and at some point the UK will have to reduce public spending. The Bank of England may decide to use the remaining £25 billion of possible quantitative easing to keep the show going for a bit longer, but markets are now looking through that to ask what happens when the markets have to supply all the government borrowing they want unaided by artificial stimulus.