Why good economic news is bad news for Britain

http://www.guardian.co.uk/business/economics-blog/2013/feb/05/good-economics-news-bad-uk-services

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The better than expected figures for the services sector on Tuesday morning highlight the dilemma faced by all indebted countries. Good news is bad and vice versa.

Looking at the bad news first. It was almost a shoo-in, after a raft of recent data pointed to a triple-dip recession, that Bank of England governor Sir Mervyn King and the monetary policy committee would print more money in the coming months. Bad data is good because when the Bank expands its quantitative easing programme the value of the currency depreciates. And a falling pound should give a lift to exports.

Britain, like most indebted countries, is desperate to wean itself off the easing profits that come from investments in property and build up manufacturing. If the services sector struggles and prompts more QE, manufacturing has a chance to re-establish itself.

In recent months the pound has declined from $1.65 to $1.57 and from almost €1.23 to €1.16. That follows predictions of low or zero growth for the UK while the euro re-establishes itself as a safe haven and the US economy continues to recover – and provided a significant opportunity for manufacturing.

But now we have a survey of the services sector that shows the economy is improving. The CIPS/Markit services survey covers transport, storage and communication, financial intermediation, business services, computing and IT and hotels and restaurants.

Immediately, economists have lined up to discredit forecasts of a triple dip. They say maybe the Bank of England will refrain from printing more money as consumers return to spending on hotels and computers. Business confidence is up. Suddenly the trend is thrown into reverse and the pound is up against the dollar and euro.

Yes, it's cheering that at least one sector is showing signs of life, but this yo-yoing does nothing for the efforts of manufacturers who want to plan ahead. No wonder Iceland has mooted joining the euro, if only for the certainty of a fixed exchange rate with the majority of its export partners.

But the more important point in the short term is that the services sector has indicated a recovery in each of the last two years only for it to fizzle out by the spring. This could happen again. When the services figures from all the eurozone countries, except Germany, are terrible and retail sales figures for the entire 27 member EU were down by 0.6% in December, the outlook across the UK and the continent remains gloomy.

So it's possible the Bank of England could delay the next tranche of QE and manufacturers abandon their next export drive, all because one month's figures for one section of the economy sends traders into a spin and economists into hyperbolic ecstasy when the situation is just as weak now as it was last year. Looking through the volatile monthly figures, the National Institute for Economic and Social Research forecasts that growth this year will be virtually flat, like last year. Hopefully, the misgivings of gloom-mongers will reassert themselves and manufacturers can see export growth return.