Poor Darling

It has been a long running theme of this column that it is better for a chancellor of the exchequer to be lucky rather than good. They don’t come much unluckier than Alistair Darling.

While his predecessor Gordon Brown took on a strong economy, Darling inherited the mess Brown created and had the former chancellor looking over this shoulder all the while. So Brown continues to portray himself, with some success, as the economic saviour of the world, poor Darling is pilloried for the global meltdown.

It is something of a mixed blessing for Darling that he has survived in his post despite the widely held view that he would be axed for a mess that was not of his own making in a desperate attempt to save the skin of the man who actually was responsible.

Perhaps it was the strength of opposition, even within the Labour Party, to having as a replacement chancellor the highly unpopular Ed Balls, the man who espoused endogenous growth theory to great scorn. Perhaps the prospect of losing another Cabinet minister on top of the three who quit was too much. While a reshuffle can look like decisive leadership, too many changes gives the appearance of panic.

For all his faults Darling has made a dire economic situation tolerable. We do not yet know if he did all the right things but he took drastic, decisive action when it was needed and the situation today could have been far, far worse while it is difficult to see what he could have done that would have worked out any better.

Unfortunately for Darling he is stuck with the continuing economic difficulties. He will soldier on as the government crumbles around him while another chancellor from another party will get the credit as everything eventually is sorted (or he continues to receive the blame as the country sinks in the quagmire).

Yet my sympathy for Darling is tempered with the thought that you often make your own luck. If Darling had not been greedy with his expenses, if he had not employed an accountant at our expense and concentrated instead on making income tax forms less taxing, he would be the subject of much less opprobrium today.

The pound has taken a tumble over fears that Brown’s government will rumble on powerless and without a parliamentary programme for another year. That is likely to happen. The calls for a general election are from those who hope to gain rather than a genuine appeal for what is right.

Ignore the nonsense about Brown not having been elected. He was elected by his constituency, as all MPs are. Prime Ministers are not chosen by the electorate and it is not particularly practicable that they should be. Prime ministers in the past who have taken over in mid term have delayed a general election until they thought they would win or time ran out, as it will do for Brown.

How full is the pot?

Once again we have conflicting signals on the economy and once again investors cannot be sure if the pot is half full or half empty.

Much has been made about the improvement in May of the Purchasing Managers Index, which rose for the third month running to reach its highest level for a year.

This index has a name to make the eyes glaze and indeed it was largely ignored for some time by economists and the press (the index compilers needed a marketing manager). However, you ignore it at your peril as it is a very useful early indicator of economic trends.

Basically it tells you whether manufacturing is expanding or contracting. A figure over 50 indicates that companies are increasing their orders for supplies, which in turn suggests increased economic activity over the coming months. On the other hand, the further we go below 50, the greater the contraction is going to be.

After the hype about three improvements in a row comes the reality. The index is still down at 45.5, indicating continued contraction. This is the 13th consecutive month below 50, which equals the longest negative sequence that the index has recorded.

Production and new orders continued to decline in May, albeit at the slowest rates for 12 and 14 months respectively, and companies scaled back output in response to reduced new orders and in a continuing effort to cut the amount of stock they hold, according to the Chartered Institute of Purchasing & Supply which compiles the index.

Manufacturers ‘noted reluctance among clients to spend’. The capital goods side did particularly badly, indicating that few companies are investing ready for the end of the recession. Manufacturers continue to lay off staff and new export orders are still falling rapidly.

There in a nutshell is the current state of play. The pot is still half empty.

Or is it? Three days later came the Purchasing Managers Index for the services sector. This did top 50 for the first time in over a year. Given that the contents of this survey cover three quarters of the economy, the implication is that the recession could end in the second quarter.

I believe we are still bumping along the bottom and will continue to do so during the summer. Hopes are rising, though, for an upswing in the autumn. Tread carefully, but look to get back into the stock market. Darling may be vindicated long before the government falls.