A combination of the crisis in the eurozone and weak domestic demand is putting the skids under the UK\\\’s manufacturing sector once again.
Like the economy as a whole, industry is still struggling to get back to the level of output at which it entered recession and is once again facing severe headwinds.
The latest release from the Office for National Statistics showed that industrial production – the sum of manufacturing, North Sea output and electricity, gas and water supply – remained unchanged between March and April.
This, though, was a much poorer performance than it looked on the surface. Firstly, industrial production was boosted by a strong weather-related increase in gas and electricity supply caused by the unusually cold spring weather. Manufacturing, which makes up two-thirds of industrial production, saw a 0.7% month-on-month decline.
Secondly, business surveys had suggested that April had been quite a good month for Britain\\\’s factories and there were hopes that higher production would help the economy grow in the second quarter of 2012 following declines in the last three months of 2011 and the first three months of 2012. It now looks even likelier that gross domestic product will fall for a third successive quarter between April and June, particularly given the impact on output from the extra bank holiday.
Clearly, the travails of the single currency are having an impact, and the intensification of the euro\\\’s sovereign debt problems following the Greek and French elections in early May suggests that worse is to come for UK exporters. That, though, is not the end of the story. Manufacturers are also finding it hard to sell into a home market where consumers are wary and businesses reluctant to invest.
Most disturbing of all are the long-term trends highlighted by Tuesday\\\’s ONS report. Manufacturing is 8% below its pre-recession peak and shows no sign whatsoever of being the engine for economic rebalancing sought by ministers.
In the recoveries of the 1980s and 1990s, a big fall in the value of sterling led to a strong, if temporary, rebound in manufacturing output. Despite a 25% reduction in the value of the pound since 2007, that has not happened this time.
This suggests that the UK\\\’s problems are deeply structural: there is insufficient manufacturing capacity, ageing plant and machinery and a tendency for cash-strapped firms to use a cheaper currency to increase margins on their existing export sales rather than as a way of breaking into new markets.
This is all happening at a time when the North Sea is running dry. Oil and gas extraction in April was 59% of its level in 2008, a quite staggering decline in such a short period. As a nation, we have become used to North Sea production compensating for the hollowing out of manufacturing. That is no longer a tenable proposition, and it is nothing short of a national scandal that the chance has been blown to use this once-in-a-lifetime windfall to refit the economy for the 21st century.