And What About Britain?

May 6, 2008

The British PMI scores in April reflect an intensifying slowdown of that economy. The service-sector index had a 50.4 reading, essentially connoting stagnation. That was down 1.7 points from 52.1 in March and down 7.4 points from 57.8 in August when the global credit crunch began. The manufacturing PMI score in April was 51.0, down only 0.3 from 51.3 in March but 5.1 points below the August 2007 reading of 56.1. The sum of the two PMIs in April, 101.4, was at a 5-year low and 12.5 points softer than their sum eight months ago. With house prices showing negative 12-month changes, the U.K. economy is charting a path that resembles that taken by the United States far to closely for comfort. It would be a surprise if the Bank of England reduced its Bank rate a fourth time this week to 4.75%, following 25-bp cuts last December, February and April. Such a move would be interpreted as a sign of panic, since two of nine policymakers objected to easing in April on the grounds that not enough time had elapsed since the second rate reduction in February. But little doubt remains that more monetary easing will be needed and soon.

The downshifting British economy is having a more profoundly adverse effect on the mood of voters than what is happening in other countries. The Labour Party received its weakest voter support in four decades in recent local elections, and Prime Minister Brown, who is unlikely to hold a parliamentary election before 2010, presently lacks credibility. The passage of time will shift the economy of Britain and the world by then. Brown’s bigger problem is that he has failed to strike any rapport with voters. Personality traits that seemed to work well when he was Chancellor of the Exchequer, that is head of the Treasury at 11 Downing Street, have turned to negatives in his new post at 10 Downing. The British do not like the idea of Brown representing them to the world or leading them in the months ahead through a very challenging global environment. It would take an unexpected and successful role as hero — such as when Lady Thatcher stood down the Argentines to retake the Falkland Islands in 1982 — to ressurrect Brown’s standing with the people. That’s extremely unlikely. Brown is no Thatcher.



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