January 14, 2008 | posted by Michael Baxter in Sterling, UK economy |

You may recall that last November, oil went to within a smidgeon of $100 a barrel. It went up again at the beginning of this month, but by this morning the black stuff was down to $92.86. Okay, that is still high, but at least it has fallen by around 6 per cent over the last six weeks or so. But here is something odd, while oil has fallen in dollars, when measured in pounds, it has barely changed at all.

In fact last November, when oil hit its then all-time high, the cost of a barrel in sterling was £47.92. This morning, it was costing £47.39. (That’s based on oil on the New York Mercantile Exchange, which we monitor.)

At 1.9595 dollars to the pound, not only is the UK’s currency now down 14 pence on the high set at the end of last year, it is actually lower than the levels seen at the beginning of last year.

The euro to pound ratio is now, of course, at around it lowest all time level.

But the pound is not the only icon to see the rises of last year cancelled out. This morning the FTSE 100 opened at a lower level than its opening position at the beginning of 2007. For a while last year it seemed that the FTSE 100 would at last hit a new all-time high but, alas, it was not to be.

Mind you, maybe it’s not surprising the FTSE 100 is so far down. According to a report from Ernst Young, 2007 saw the highest level of profit warnings since 2001. Even more worrying, the last quarter of last year was the worst-performing period, with profit warnings up 20 per cent.

The worry is this. We know the consumer is not feeling too well, and probably needs to take to his or her bed, and take it easy for a few months while the debt temperature falls. So the UK needs business. The slowdown in 2001 was caused by a business-led crisis - and the economy was kept going by the consumer.

The last recession, which did its worst in the early years of the ’90s, was caused by a consumer slowdown - the fear has to be that this time, both industry and the consumer are coming off the rails at the same time.

The good news from the Ernst and Young data, two of the worst-hit areas were in retail and leisure - that’s pubs and clubs. This would suggest it is a consumer problem still.

But more worrying is the latest report from the Office for National Statistics. Manufacturing output decreased by 0.2 per cent in the three months to November 2007 compared with the three months to August 2007.

Capital Economics says, “Overall, we do not think that it will be too long until the deterioration in the economic climate both at home and overseas pushes the manufacturing sector into its fourth recession in eleven years”. It concluded “Industry will contribute, rather than offset, to a weakening in overall economic activity this year.”

And yet hope does seem to be coming from over the horizon. The bugle is playing and the cavalry might yet save us. Surely the falling pound will make our industry more competitive, and exports will help push the UK along. The snag with this, the falling pound won’t really show up in improving stats on our manufacturing sector until the year’s end.

And here’s the warning. The Bank of England has to play this carefully. A falling pound will ultimately lift the UK, providing the benefits of a falling pound are not cancelled out by inflation.

So the Bank of England must not lower interest rates too much; on the other hand, it’s expectations of falling rates that in part lie behind the falling pound. So you see the problem?