The SW England economy showed a little bit more life in January – the output and employment balances of the SW PMI survey were both just above 50, suggesting a modicum of expansion. UK retail sales were firmer than expected and, overall, the gloom of late 2011 receded a little. But, only a little. With many household’s suffering real income declines, through wage freezes, job losses or low wealth returns, the appetite for demand growth is limited. Price discounting can only hold up spending for a while.
On the supply side, the latest SW MAS survey finds that about 35% of SW manufacturers plan to invest in new technology in the months ahead. Of those, virtually half intend to self finance. These ratios are good but not great and pretty much what I would expect at this point. What is unknown is the underlying motivation for investment. Are these positive intentions driven by expanding markets and the prospect of higher profits or defensive investments driven by a need to replace depreciated assets and merely keep up with competitors?
In due course, assuming international demand conditions stop deteriorating (good signs here from America but not Europe), economic theory suggests the investment cycle will turn upwards. Some need to spend returns as durables start to wear out and housing stabilises. Slowly, confidence responds. This can gradually push us out of the downturn. For now, though, one swallow does not make a spring. January may have been a bit better than expected but it will be well into April or May – crucially, after the Chancellor’s March budget – before we can judge whether the winter is over.