Yorkshire Post

Article for Yorkshire Post: 2nd April 2002
Jeremy Peat
Group Chief Economist
The Royal Bank of Scotland

Spring came to Yorkshire last week. I had every reason to be aware of this welcome climatic trend, as I spent three days around the county, speaking with a wide range of our customers and staff. I also met with large groups from the Chambers of Commerce in both Leeds and Bradford, providing another welcome opportunity to test local business folk’s view of the economic temperature – as the sun shone so splendidly.

My starting point for these discussions was an increasingly optimistic view of the global outlook – and hence of the backcloth for business in the UK as a whole and Yorkshire in particular. Indeed my optimism has been increasing in recent weeks.

The UK economy out-performed its peer group through 2001 as a whole – with the strongest growth and lowest unemployment amongst the G7 – the top seven industrial countries. However, during the latter part of 2001 our economy slowed. At the same time the dichotomy between external and internal-facing sectors widened – exemplified by buoyant services and severely stressed manufacturing. Domestic demand was strong last year, as domestic policy was soundly managed with welcome interest rate cuts and fiscal loosening. But deceleration and the dichotomy demonstrated that a positive view of the future required more than sound domestic policies. The Monetary Policy Committee at the Bank of England has reached the limit of their scope for interest rate cuts. Now we need external recovery, to permit both re-acceleration and re-balancing.

This external recovery looks to be underway, led by the USA where both consumption and – crucially – investment look to be on the up. The economies of our key partners in the Eurozone have been lagging, particularly the largest of these – Germany. But even here there are more positive indications emerging from forward-looking surveys. Given continuing improvement in all these economies the domestic outlook is increasingly encouraging.

It was reassuring that my economist’s view – based primarily upon data – was broadly supported by the more anecdotal view from the economic frontline. Clearly service sector companies – in Leeds in particular – have thrived through recent months, despite recession in manufacturing. Now most Yorkshire-based manufacturers are seeing either hints of increasing order books or suggestions that new orders should lie ahead. For the great majority of the businessmen and women who I met the economic crystal ball had at least a rosy tinge around the edges.

Of course major concerns remain for some, particularly in the ‘older’ manufacturing sectors where re-structuring continues apace and the problem has been as much increasing competition from low cost economies as the decline in global trade. But even in textiles there are some bright spots. Re-structuring to the higher value-added end, plus margin squeeze and the continuing search for niche markets where quality matters, have opened up opportunities for the years ahead. Of course there are understandable gripes about sterling’s strength against the euro – in fact due to euro weakness rather than sterling strength – but this has been the case for many a moon now.

This improving environment does not mean that all is sweetness and light for Yorkshire’s business community. Competition in all sectors – manufacturing, services, construction or whatever – remains intense. What to expect from the Budget was a constant theme, with nobody overly convinced by the supposedly business-friendly pre-Budget leaks emerging over the week from 11 Downing Street. Many companies would welcome reductions in regulation more than further tinkering with tax regimes.

A number of other concerns were regularly raised in my discussion. The issue of UK and possible EMU entry is clearly nagging away, with many seeking enlightenment and objective analysis of the economic pros and cons as much as anything else. Then there were concerns about international politics as much as economics. Would events in the Middle East provoke oil price rises, with adverse implications for the still fragile global recovery? Would the ‘steel wars’ lead to wider impacts – with memories here of the banana wars of a few years back and the suffering that that dispute caused – for no logical reason - for the cashmere industry.

Nevertheless, my general conclusions were that the coming of spring had co-incided with rising optimism regarding the economic outlook. Let us hope that on this occasion the co-incidence of improving economic forecasts and anecdotal upswing shows that we are all correct!