As was told here yesterday, the OECD reckons the UK is already in recession and, more to the point, it is the only member of the G7 to be so inflicted. Meanwhile, the US, the country of origin for credit crunch poison, is doing pretty well. How can this be, and what can this tell us about the UK's ailment, and its cure?

Yesterday the latest data on US manufacturing from the Institute of Supply Management was out. Their Purchasing Managers index fell to 49.9, suggesting the sector is now in recession, but by the thinnest of margins - a score of 50 indicates no change.

Yet, all things considered, this really isn't bad. Isn't the US supposed to be in a right royal mess? How has its manufacturing sector managed to hold up as well as it has?

Well, the answer isn’t hard to find. The exports component of the PMI index rose from 54 points in July to 57 in August. Meanwhile, the index measuring imports is below 50.

Uncle Sam is enjoying an export boom. In the second quarter of this year, US exports soared 13.2 per cent, while imports fell by 7.6 per cent. In fact, the number crunchers say external demand added 3.1 per cent to GDP during the period, accounting for all but just 0.2 percentage points of the expansion the US enjoyed.

And why is that? The answer is actually not hard to find at all. The big dollar sell off of 2007 and the first half of 2008 made US exporters competitive in a way that they had not experienced for a very long time.

You know what is coming up next. Hasn't that now changed? Aren't investors pouring their money back into dollars again, jumping from euros and sterling?

The answer is, of course, yes. Yesterday the pound fell to a two-and-a-half-year low against the dollar and an all-time low against the euro. At the time of writing there are just 1.772 dollars to the pound.

So the UK, just like the US 12 months ago, now has the opportunity to export its way forward. There is just one snag. When the US export-led recovery began, the rest of the world was still in good shape. Not so, any longer. The UK may be the only G7 member the OECD reckons is in recession, but our main trading partners are only managing to move forward at a limp.

Yesterday, markets in Asia fell to a two-year low. Now markets are not always rational, they are not good at predicting recessions, but when any index falls to a two-year low you have to take notice.

The world is now paying the price for the US shift. It was always going to be thus. You can not have the world's largest net customer pushing to become its largest net supplier instead, without pain elsewhere.

So, the fall in sterling is bad timing for the UK. It has chosen that moment to rely on exports, when the rest of the world is struggling. Even so, the falls in sterling are so dramatic that it seems likely exports will benefit. The key, perhaps, lies in when the rest can start expanding again.

2009 is likely to be a tougher year for the US. The George Dubya tax credit has now been all but spent. The slowdown in Europe will hit US exports. Europe, on the other hand, seems to be suffering from a less prolonged crisis. It appears the big problem for Europe is that its central bank has taken a tougher stance on inflation. Expect the Eurozone to come out of inflation that much sooner as a result. This in turn will enable the ECB to cut interest rates. At that point, Eurozone consumers are more likely to buy British goods.

The key, then, lies in how soon inflation will start falling.

©2008 Investment and Business News. All Rights Reserved.

Well, actually, inflation in the UK has not peaked yet. Utility bills are still rising, and it seems the consumer price index may well hit 5 per cent within a few months - expect some nasty headlines when that happens. But, looking beyond that, it seems there are reasons to believe the index will then fall sharply.

Consider the price of oil. You remember what it was like earlier this year and last. The price of oil soared on the thinnest of rumours. You would have thought that earlier this week, as Gustav wailed its way inexorably towards the US, the black stuff would have risen in price.

You would have thought that, as the world’s second largest exporter of oil - that would be Russia - plays soldiers, and gives its tanks a good airing, and Vlad recalls the good old days when he was in the KGB, the price of oil would rocket. But, it didn't.

Then, as that mother of a storm that was Gustav turned into something of a less-fiery Aunt, oil fell. All of a sudden, they are talking about $100 a barrel again.

As ever, there are plenty of reasons to fear this could change. Iran is trying to persuade fellow OPEC members to cut oil supply. Yet normally, even the whiff of a rumour about Iran and Venezuela working together would have sent oil soaring again.

It has been argued here many times before, at current levels oil is not affordable. Should it stay at the current price for an extended timeframe, the global economy will hit recession - and that will hit OPEC. If markets are left to their own devices, and political interference is kept to a minimum, oil will fall rapidly next year.

It is also very much in OPEC's interests to see oil fall in price - although, in the longer-term maybe not in our interests. The longer oil stays at current levels, the sooner the West will develop alternatives. Solar and wind power may represent the potential for cheap energy for ever, they may represent the solution to global warming, but they would be bad news for OPEC.

So there are two reasons to expect oil to fall in price. Firstly, the credit crunch is causing demand to fall. Secondly, OPEC would be shooting itself in the foot if it tried to stop the fall.

But it is not just oil which is falling; wholesale gas, wholesale electricity and agricultural commodity prices have all fallen recently. Recently, the CBI produced data to suggest the core output price inflation is set to fall.

It will take time. It is like moving a massive ship - there is an extended time lag between a change in the factors that determine course, and the actual change in course. Let's just hope that the UK can see a change in direction before it hits an iceberg.

©2008 Investment and Business News. All Rights Reserved.

It seems that UK listed companies are shaking off the effect of the credit crunch and generating cash at an extraordinary rate.

According to KPMG, City analysts expect that the FTSE 350 will generate over £301.9 billion in surplus cash from 2008 to 2010. This is a massive contrast with what was expected in January 2007, before the credit crunch. Back then, surplus cash generation was expected to hit £198 billion during the period.

As for FTSE 100 companies, KPMG's Cash Counter predicts that the FTSE 100 will amass £278.3 billion in surplus cash by the end of 2010 - up a staggering 60.6% from January 2007's £173.3 billion three-year forecast level.

So how can this be? KPMG says: “Research shows that the huge increase is almost all due to the bonanza currently being experienced by Oil & Gas and Mining companies - a situation that KPMG thinks is likely to continue despite recent falls in oil and gas prices.” But here is the surprise, when Oil & Gas and Mining cash flows are excluded, the FTSE 100's surplus cash forecast has increased by 1.7 per cent from January 2007, implying that the City believes that corporate earnings will remain robust.

David Simpson, a partner in KPMG's Corporate Finance practice, said: "The findings of KPMG's latest Cash Counter analysis are surprising in that they show robust corporate cash flow despite the current gloomy economic environment." He added: "Nevertheless, since KPMG's last survey, we believe that the most likely use of surplus cash has changed from use or return to retention. We also believe that the low activity level of Private Equity players leaves the field open for companies with strong balance sheets to pursue strategic acquisitions."

©2008 Investment and Business News. All Rights Reserved.

You know there is this thing called a Credit Crunch - which presumably means credit is hard to come by. Well, explain this. In July 2008, UK personal debt exceeded GDP.

According to Credit Action, personal debt at the end of July 2008 stood at £1,449bn. This has increased 6.9 per cent in the last 12 months, which equates to an increase of ~ £93bn. According to the latest data, GDP currently stands at £1,410bn, having increased by 5.1 per cent over the past year. In short, we owe more than we earn.

Total secured lending on dwellings at the end of July 2008 stood at £1,218bn, up 6.9 per cent in the last year, and total consumer credit lending to individuals hit £231bn, up 6.8 per cent in the last 12 months.

Here are some more statistics to make you think:

In the days when the Department for Business, Enterprise and Regulatory Reform Guidelines (BERR) was more snappily called the DTI, it estimated that the threshold for becoming over indebted was an individual spending over 25 per cent of their gross monthly income on unsecured repayments.

The proportion of people spending over 30 per cent of their monthly income on unsecured debt repayments has doubled over the past year to 14 per cent, according to research commissioned by Callcredit.

If you want to understand the key problem faced by the UK, it is summed up in that data above. For years we were told that the soaring level of debt in the UK was affordable, that it was matched by the value of our asset holdings, and that we had no reason to fear.

The truth was quite different. The belief that debt is justified if house prices are rising may make sense for an individual, but for the country as a whole this is a fatal error. It is an error that is now being corrected, and it is very painful.

©2008 Investment and Business News. All Rights Reserved.

As was told here yesterday, the OECD reckons the UK is already in recession and, more to the point, it is the only member of the G7 to be so inflicted. Meanwhile, the US, the country of origin for credit crunch poison, is doing pretty well. How can this be, and what can this tell us about the UK's ailment, and its cure?

Yesterday the latest data on US manufacturing from the Institute of Supply Management was out. Their Purchasing Managers index fell to 49.9, suggesting the sector is now in recession, but by the thinnest of margins - a score of 50 indicates no change.

Yet, all things considered, this really isn't bad. Isn't the US supposed to be in a right royal mess? How has its manufacturing sector managed to hold up as well as it has?

Well, the answer isn’t hard to find. The exports component of the PMI index rose from 54 points in July to 57 in August. Meanwhile, the index measuring imports is below 50.

Uncle Sam is enjoying an export boom. In the second quarter of this year, US exports soared 13.2 per cent, while imports fell by 7.6 per cent. In fact, the number crunchers say external demand added 3.1 per cent to GDP during the period, accounting for all but just 0.2 percentage points of the expansion the US enjoyed.

And why is that? The answer is actually not hard to find at all. The big dollar sell off of 2007 and the first half of 2008 made US exporters competitive in a way that they had not experienced for a very long time.

You know what is coming up next. Hasn't that now changed? Aren't investors pouring their money back into dollars again, jumping from euros and sterling?

The answer is, of course, yes. Yesterday the pound fell to a two-and-a-half-year low against the dollar and an all-time low against the euro. At the time of writing there are just 1.772 dollars to the pound.

So the UK, just like the US 12 months ago, now has the opportunity to export its way forward. There is just one snag. When the US export-led recovery began, the rest of the world was still in good shape. Not so, any longer. The UK may be the only G7 member the OECD reckons is in recession, but our main trading partners are only managing to move forward at a limp.

Yesterday, markets in Asia fell to a two-year low. Now markets are not always rational, they are not good at predicting recessions, but when any index falls to a two-year low you have to take notice.

The world is now paying the price for the US shift. It was always going to be thus. You can not have the world's largest net customer pushing to become its largest net supplier instead, without pain elsewhere.

So, the fall in sterling is bad timing for the UK. It has chosen that moment to rely on exports, when the rest of the world is struggling. Even so, the falls in sterling are so dramatic that it seems likely exports will benefit. The key, perhaps, lies in when the rest can start expanding again.

2009 is likely to be a tougher year for the US. The George Dubya tax credit has now been all but spent. The slowdown in Europe will hit US exports. Europe, on the other hand, seems to be suffering from a less prolonged crisis. It appears the big problem for Europe is that its central bank has taken a tougher stance on inflation. Expect the Eurozone to come out of inflation that much sooner as a result. This in turn will enable the ECB to cut interest rates. At that point, Eurozone consumers are more likely to buy British goods.

The key, then, lies in how soon inflation will start falling.

©2008 Investment and Business News. All Rights Reserved.