Why Does The Bank Of England Want A Weak Pound??

Just as the pound was starting to recover the Bank of England's announcement yesterday about the UK economy set back it's recovery. It hit 1.53 for a while and then immediately dropped back to 1.51 where it has remained. That's still not too bad given that it fell to below 1.40 a little while ago but the point is that it was on the rise and the announcement stopped it in it's tracks.

I don't know why but the Bank seems to want a weak pound? Maybe to help exporters and therefore an export led recovery. I just think this is not what the Bank should be thinking. Why do they value exporters so highly? There are so many ways the country can succeed and exporting manufactured goods is only one of them. My company imports so we hate a weak pound. Yes while we do import we also add a lot of value to the products we import with research and development. But this won't show up on the figure's the Bank has. The other point is that where Britain tends to succeed is in higher value items which are not so price sensitive. If someone buys a McLaren road car they are not bothered about a price drop - in fact it would probably put them off.

Therefore a weak pound might make those goods cheaper but if they are not seeking to compete on price anyway it might have a marginal difference. Surely the Bank doesn't want the UK to export products which are also being made in China or India? There is no point in that. British companies should be partnering with Chinese and India manufacturers to produce world beating product's which then go on to export to other countries.

I don't know what the Bank wants but I think a weak pound is not the way to go. My company wants it back to at least 1.60 but the end of the summer and keeping the pound low won't help the recovery in my opinion.

Have We Hit The Bottom?

Well, we are all hoping so! I think there are tentitive signs that we are into the phase of bouncing along on the bottom of the curve. From my companies experience we are, in terms of turnover, about the same as last year, which we consider a really good result although it's frustrating not seeing our business grow year on year (A new experience for us!).

I think there are signs the summer will see some stabilisation and then perhaps some growth right at the end of the year. It all depends on the unemployment rate and if the various stimulas plans are effective. Obviosly we don't want a reflationary boom in 2010 and to that end government and bank of England policy will have to be timely but from my perspective I think the G20 meeting hit the nail on the head and set a framework for lifting the world out of the credit crunch. I find the IMF to be persimistic and I don't understand why they seem keen to add to the bad news which everyone is faced with on Television. It is so important to maintain confidence during a downturn. As FDR said while implimenting the New Deal in the 30's "we have nothing to fear except fear itself" and as JM Keynes said in a slightly different way that recessions can be self reinforcing. A free press is a wonderful thing and must always be defended however the freedom they enjoy must come with responsibility and I am always hoping they will start to report the economy in a more balanced and responsible way. Perhaps too much to hope for!

Still back to the main topic - I think retail sales might be down a bit in April after being a little higher in March. (see end of this article)

Still the month is not over yet and we will see. We might yet see a little late surge to make up for a weaker month thus far.

Frankfurt Music Messe

This is a huge trade show which happened last week. I was there assisting one of our key suppliers on a stand. Exhibitors and visitors came from all over the world to see the latest products and get up to date with industry news. The current economic difficulties were having an impact by each and every person I spoke to. However, everyone also said they were hanging in there. There seemed to be a mood that perhaps the worse was over and even if things did not get better for the moment at least they would stabilise.

Perhaps this is natural optimism by people who might lose a business which they have worked many years to create, but nonetheless I think it's work reporting that it was not all doom and gloom.

Container Rates

The BBC reporter Robert Peston has made reference to the dry Baltic rate on a number of occasions. This rate refers to the cost of transporting containers around the world with the goods which end up in UK shops. These rates had been dropping significantly since the last quarter of last year as demand for China's manufactured goods reduced in the US and Europe. Generally speaking, a falling rate for containers means that there is a falling demand for goods around the world and this is not a good sign for the world economy.

Well, I have to report that container shipping prices have started to move up. In fact they have increased significantly - maybe 30% up starting in April.

So now everyone will have to pay more to ship containers from China. This does not signify the end of recession because the ships are still running below capacity but it just might be a small indication that the tide might be turning. The main reason prices have increased is to prevent the shipping lines going out of business - the rates they were charging for containers we too low to be sustainable.

So my advice to anyone shipping containers is to get a few quotes before booking your container forwarder. I found a dramatic variation with some brokers charging 40% more than others. When searching for your forwarding agent it's also important to make sure they are quoting for the whole job and includes all hidden charges. You want a total rate to take your container from the factory in China or India all the way to your UK warehouse. Anybody who would like the names of shipping forwarders just drop me a note on this blog.

Manufacturing In The UK

Just a short point about the lack of manufacturing in the UK. We all know many things in the shops are made in China. For many reasons it has become the workshop of the work. They can make anything, both high end and low end. But it’s not as simple as that because many of the products have been developed and perfected by buyers and product developers in the places like the UK.

So while the actual manufacturing is happening in China the development of products is to an extent happening outside. Many companies send staff over to the factories for 1 or 2 days to review products and make changes to ensure they reach the standards expected by consumers. These partnerships are a key ingredient in the success of China.

From my personal experience the factories in China respond well and quickly to new suggestions on product development and this willingness to work with companies in the west is surely a part of China’s success. So next time you hear about the decline of British manufacturing think about the fact a lot of people in the UK are still involved closely with the manufacturing process and only a percentage of the jobs have gone to China.

So anyone in the UK who used to work in the factory developing the products still has that job. I’m not sure it’s a great idea to manufacture in the UK. Why not concentrate on building the new partnerships which work rather than rebuilding something that maybe Britain no longer has a talent for? So bank of England don't say the falling pound is good for British manufactures - because really it's bad for the way we are doing business in the here and now!

Inflation?

Last week's inflation figures appeared to come as a surprise to many people. Not I think to SMEs. Since December, supplier prices to many UK businesses have been going up. This was as a consequence of increased manufacturing cost, primarily from China, and the devaluing of the pound.

Therefore to me, as a biz owner, the inflation figures were entirely predictable. What I am not entirely sure about is how the analysts missed this in the data.In theory we knew inflation was going to rise this month and we should have some idea about inflation's trajectory in the next couple of months. This leaves us with a couple of points to focus on. The first being that it appears the pound is not going to weaken significantly more and this should choke-off some of the inflation.

Secondarily, produce prices in China appear to be stabilising or perhaps falling very slightly. This might lead to a little more inflation coming through but overall I think it should stabilise and perhaps fall in the next six months. However, my guess is that deflation won't really be a problem unless there is more dramatic bad news like a major bank failure which prevents recovery in the markets for another 6 months.In fact the effect of this credit crunch may have been to choke-off a serious bout of inflation.

The timing of the credit crunch seems to have been ideal in achieving this. We may look back and say in fact we avoided a sustained period of inflation caused by sustained demand and capacity constraints in the world economy.