It’s been another week of global instability. With the Chinese stock market closing on early on Monday (04/01) after a sharp drop of 7% in its value caused the new ‘circuit breaker’ mechanism to kick in and cancel trading, things got off to a bad start. They didn’t improve much on Tuesday, either, as the instability of the Chinese markets began to effect markets around the world, with both the Dow Jones and FTSE closing down amid fears that China was struggling to maintain control. Then, on Thursday, China said they were suspending the circuit breaker system after it had been triggered twice in one week, and was causing problems of its own.
However, things appear to be looking up just a little as the working week draws to a close, with Chinese shares rising 2% to close the week at -10%, but far from as poor as it could have been. Investors have been impressed by the measures put in place by the authorities, which included suspending the circuit breaker system. The central bank also moved to firm up the value of the Yuan (China’s currency) in order to calm markets.
On the fall in the markets, Shane Oliver of AMP Capital said “[It] looks to have been exaggerated and driven more by fears and regulatory issues around the share market and currency rather than a renewed deterioration in economic indicators”. That will be a significant relief for investors around the globe. China has long been seen as the ‘engine’ of global growth by consistently posting growth percentages of around 8% for the last four years. If that growth were to drop off, it’s possible that it could trigger a series events which may send the world back into a period of recession.
This, of course, would be a great blow for UK manufacturing, which is buoyed partly by orders from China for things like luxury automobiles. The industry is as a fragile point in the early stages of 2016, seeing a slight increase in strength, but remaining on the precipice of a slump. Now, the British Chambers of Commerce have described the sector as ‘close to stagnation’ after domestic and export sales have fallen to levels to below levels seen before the recession.
The BCC said that a survey of 7,500 firms found that manufacturing was faring worse than the services sector and was reaching a point of stagnation. The organisation said that without government action to improve workers’ skills, upgrading outdated infrastructure and allowing small firms access to cheap credit, the UK economy “could suffer negative consequences in the face of increasing global uncertainty”.
Indeed, it’s clear that though the government value the UK’s historically strong service sector highly, that it cannot build an economy alone. So, further attention has to be paid to Britain’s manufacturing sector. The chancellor could be forgiven for thinking that if you get the rest of the economy right, manufacturing will pick up. But, as the BCC’s comments suggest, the reality is much different.