August 27, 2007	Monday	Sha’aban 13, 1428

International financial market turmoil which by the middle of the last week appeared to be far from over, has started adversely impacting the UK’s overall economy.

The Confederation of British Industries (CBI) reported on Wednesday that expectations for output growth in the remaining period of the current year have gone significantly weak.

With the rate of inflation slowing down considerably and the expectations that the Bank of England would therefore not hike the interest rate for the sixth time in the year when its monetary policy committee meets early next month, one would have expected the manufacturing, housing and grocery sectors to be in a state of boom.

But all these sectors seem to be in a state of flux. And as such activities in these sectors are slowing down considerably-- both because of slackening demand but also in sympathy of each other, threatening what appears to be a bout of slow down-- not in the future but just round the corner.

In a CBI survey of 644 firms between late July and mid-August found, 30 per cent of firms said their order books were above normal for the time of year while 21 per cent said they were below normal. The CBI said the resulting balance of +9 percentage points was the highest for 12 years.

Demand for manufactured goods remains high, but firms' expectations for output growth are noticeably weaker than they were in the first half of 2007.

After five months of strong expectations for increasing output, the balance of manufacturers forecasting growth dipped to +10 per cent in July and has now been followed by an only slightly more upbeat balance of +13 per cent in August. The figures contrast with the average balance from February to June of +22 per cent.

However, demand remained strong this month, with an increased balance of +9 per cent of firms reporting that their order books were above normal. Statistically this is the highest balance since 1995 (just above June's balance of +8 per cent) but there are marked differences between the manufacturing sectors.

Firms producing capital goods, such as industrial machinery, engines and agricultural equipment, said business was brisk (a very strong balance of +30 per cent reported 'above normal' order books). Consumer goods producers enjoyed a return to healthy order book levels, from July's balance of -9 to +8 per cent in August. However, manufacturers of intermediate goods, including components, parts and building materials, suffered a deterioration in demand, with last month's balance of -3 per cent taking a further knock to -11 per cent.

Across the manufacturing sector, export demand remains healthy, with order book levels considered broadly 'normal'. The balance of -3 per cent is still significantly above its long-term average (-22 per cent). Additionally, after a dip in June, stocks have now recovered to a more than adequate level.

Since the 12-year high in May (a balance of +25 per cent), manufacturers' confidence in their ability to raise prices has fallen, but the balance of +16 per cent is still elevated relative to the past decade.

Lai Wah Co, CBI Principal Economist, said: "Manufacturers are being kept busy, and their order books are still healthy, but they foresee weaker output growth for the rest of the year.

"While price pressures in the manufacturing sector have not gone away, the Bank of England can take some comfort from the expected slowdown in output growth as recent monetary policy appears to be having its desired impact.”

Evidence has also emerged of a further slowdown in the housing market and fears of job cuts. This is expected to cause the BoE to hold on to the present rates of interest, at least until the end of the year.

A latest housing market survey has warned that the global credit crunch could soon start to push up mortgage rates.

House prices rose only 0.6 per cent from July. And in recent weeks buyers appear to be dictating the prices rather than the sellers with the housing market in London leading the way.

If the BoE were to increase the interest rates further, the market would further swing in favour of the buyers as credit tightening reduces lenders' ability to provide mortgages at the rates achieved in recent months. And it is also being feared that even without further tightening of the monetary policy some slight increases in mortgage rates could be expected.

Some banks which borrowed heavily to support their mortgage lending and became early victims of credit crunch are expecting the BoE to rationalise the interest rates in the context of the current market situation and save such banks from certain bankruptcy.

Even general consumers seem to have taken the broad hint from the market turmoil and self- imposed a noticeable degree of curb on their spending. According to one supermarket survey, the grocery market grew three per cent in the 12 weeks ended August 12 - down from six in the 12 weeks to May 20. Meanwhile, market watchers here are expecting the victims of the crises in the financial institutions to file individually and in groups a plethora of lawsuits against the hedge funds, banks, insurance companies and ratings agencies accusing them of gross negligence in the run-up to the sub-prime debacle.

These suits are expected to accuse directors of failing to carry out adequate checks before buying or investing in mortgage-backed securities and other derivatives based on US sub-prime mortgages - sold to people with poor credit records. Accountants, trustees, and underwriters are also expected to be pulled into the legal net as shareholders of companies that have gone bust in the US seek redress from US, UK and continental banks.

The question expected to be asked from these professionals is how much due diligence did they do to protect their company. Potential claims are likely to arise from wrongful acts by the company and the directors and officers in the form of allegations of mismanagement with respect to sub-prime lending or their investment portfolios, their lending and foreclosure practices and the suitability of the products sold.

The implications are very far reaching and may involve millions. And if these law suits are upheld then there would be another round of turmoil as many of those found guilty while going down would take along with them a huge chunk of the market involving billions.