The decline and fall of UK manufacturing continues

One of the features of the last decade or two has been the decline of manufacturing in the western world usually in relative terms as the service sector has grown but in the credit crunch era sometimes in absolute terms too. Today has brought news from the purchasing mangers index that after 6 months of declines maybe China is entering that type of environment as well. My home country the UK has been experiencing a relative decline in its manufacturing sector for some time as indicated by this from The Manufacturer which gives us a look into our past.

Despite the decline since the 1970s, when manufacturing contributed 25% of UK GDP….

Seeing as the services sector is at 79% and rising we know that it has to have shrunk and further confirmation comes from the fact that all types of production including North Sea Oil & Gas is only 14%. This area has seen quite a large amount of structural change since the Second World War. From the Office for National Statistics.

The share of UK GDP attributable to production industries, including manufacturing, oil and gas extraction, and energy and water utilities, declined from 41% in 1948 to 14% in 2013.

If we return to just manufacturing then we have declined relative to our peers also over the same time period.

The UK and France currently have the lowest shares of GDP attributable to manufacturing industry – 10% and 10% respectively…….. The UK manufacturing industry has declined at the fastest pace of the G7 economies; resulting in the UK moving from having one of the largest shares in 1948, to the lowest in 2012.

This trend has accelerated further in more recent times.

The pace of the decline in the relative size of manufacturing industries has been fastest in the most recent years – since 1995 its share of GDP has almost halved.

Bringing this up to date

Even in the pre credit crunch period manufacturing was having a bit of a struggle.

the UK manufacturing industry grew steadily between Quarter 1 (Jan to Mar) 2002 and Quarter 1 (Jan to Mar) 2008 at a compound growth rate of 0.1% per quarter.

Steadily is one way of putting it! If we look back it was squeezed by the advance of China in particular but other emerging nations too in markets which are price competitive. Then of course something of an apocalypse took place.

The economic downturn impacted the industry severely, with output contracting by 12.2% between the economy’s peak Quarter 1 (Jan to Mar) 2008 and the economy’s trough in Quarter 2 (Apr to June) 2009.

Actually that sharp recession also flashes a depression warning too especially as we note that the recovery stalled and then faded.

Following the economic downturn in 2008 and 2009, manufacturing returned to growth for a short period, before falling again in 2011 and 2012.

The manufacturing sector did then regain some growth but this seems to have drifted away again so far in 2015.

Manufacturing output increased by 0.5% in June 2015 compared with June 2014.

The last three months to June saw two falls and one rise with the transport sector strong but the chemicals and drugs (still mostly legal ones although other influences presumably apply now) sector was weak.

What cause the fade?

One influence on the sector has been the relative strength of the UK Pound £ which started its rise back in March 2013. Back then the trade-weighted level of the Pound was just below 78 whereas it ended last week at 92. I am not one of those who believes that the smooth demand and supply curves of economic theory have much validity any more but a sustained increase of that size  will have been likely to have put a little brake on things. Possibly we are seeing that in our relatively better trade performance with the United States as the US Dollar has also been strong.

As ever many effects are at play as for example a stronger Pound will have helped the fall in inflation reducing costs and the improvement in the Euro area economy will have helped. But overall we will have lost a little I think.

Bank of England

Governor Mark Carney seems to want to exacerbate this issue if his comments at Jackson Hole over the weekend are any guide.

Indeed, as I said recently, the prospect of sustained momentum in the UK economy and the gradual firming of underling inflationary pressures will likely put the decision as to when to start the process of gradual monetary policy normalisation into sharper relief around the turn of this year.

There has been quite a lot of talk by him about what at 0.25% seems in many ways not that big a deal! However it is likely to help keep the UK Pound £ strong and of course would nudge manufacturers costs higher.

Another factor where the Bank of England is supposed to be helping manufacturers is via the Funding for Lending Scheme so let us check on today’s data.

Loans to non-financial businesses increased by £0.7 billion in July, compared to the average of £0.0 billion over the previous six months. The twelve-month growth rate was -1.2%. Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.1 billion, compared to the average monthly increase of £0.2 billion over the previous six months. The twelve-month growth rate was -0.4%.

For all the hot air or open mouth operations there does not seem to have been much impact here as business lending since the FLS began in July 2012 has consistently declined. You can see how the new “improved” version is doing from the 12 month growth rates. Of course there is the counterfactual but this rather feels like the David De Gea transfer saga when we look at another area influenced by the FLS.

Consumer credit increased by £1.2 billion in July, broadly in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.3% and 7.5% respectively.

Here we do have a troubling picture as the technocrats of the “independent” Bank of England have boosted the housing market and consumption whilst applying a brake to manufacturing and hence exports. Or the main error of politicians when they had the job.

Today’s numbers

This morning’s business survey or purchasing managers index (PMI) continued the recent disappointing trend.

The UK manufacturing sector remains in a holding pattern, with production growth hovering around the stagnation mark and marginal job losses reported for the first time in 26 months.

The actual reading of 51.5 showed marginal expansion which in some respects we should welcome on a day where such numbers have disappointed in general. But we are grinding forwards at best.

Export order volumes continue to disappoint, with the sterling exchange rate, weak sales growth to the eurozone and the slowdown in China all having an impact.

There were also a couple of points relevant to Mark Carney’s interest-rate promises.

The employment picture also lacked colour with a slight fall in employment……The biggest news is the drop in the input price index which signalled one of the sharpest rates of decline for 16 years.

Comment

We find ourselves in what has become familiar territory. For all the grand words UK economic policy tends to push the consumption and housing market buttons to achieve expansion and forgets manufacturing. It means that we are unlikely to be singing along to Heaven 17 any time soon.

Crushed by the wheels of industry
Crushed by the wheels of industry
Crushed by the wheels of industry
Crushed by the wheels, ooh, ooh

However we should not get too despondent as there is also much to be proud of. From The Manufacturer.

UK manufacturing is strong with the UK currently the 11th largest manufacturing nation in the world. Manufacturing makes up 11% of UK GVA and 54% of UK exports and directly employs 2.6 million people.

Also according to the EEF it is good for one of the problems of the UK economy which is productivity. It has the numbers some 20% higher than for the Uk economy as a whole presumably driven by performance like this.

And output per hour in manufacturing has expanded at an average quarterly rate of around 0.3% since Q1 2009, compared with almost 1% per quarter prior to the downturn.

But as you can see it has slowed and more recently it has gone negative (ironically as overall UK productivity has picked up). So questions remain and we seem unable to escape the mistakes of our past. What can we do about it?

Transfer Deadline Day

After my analysis of last Thursday on the inflationary bubble that is English Premiership football I did a piece for Share Radio which is below.

https://audioboom.com/boos/3524351-notayesmansecon-reviews-the-ever-expanding-football-industry-morningmoney

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21 thoughts on “The decline and fall of UK manufacturing continues

  1. It’s a choice, you know.
    Successive governments over the past have deliberately chosen services over manufacturing for two reasons:
    1) The workforce in services is so disjointed that it can never have any power; a pre-requisite for the redistribution of wealth upwards.
    2) Since finance creates its own money, it can afford to pay politicians corrupt post-career sinecures in a way that manufacturing never could. Payola.

    • Could not agree more. Successive governments and especially the Labour, did nothing for manufacturing during their period in office. No help was given to industry to modernise and to create a skilled workforce. Not that uneconomic sectors should be state funded, but that by tax and funding assistance, viable industry should have been supported. This did not happen and now we are in a position to be almost totally reliant on the service sector, which can grow rapidly, but can also decline rapidly.
      As you say, manufacturing is not sexy and who wants a job in industry after a life in politics.

  2. Hi Shaun

    Unfortunately I think it’s worse than you imply. Following up on the comment made above by therawbuzzin we now have a much larger finance sector which makes us much more vulnerable than we were even thirty years ago. In the words of the philosopher John Gray we now have a “raffish” type of capitalism and not one rooted in science and technology as we had just after the war.

    If you take this with the recent news that many of the much vaunted apprenticeship schemes are in low paid service jobs and seem little more than an excuse to pay less than the NMW this can only augment the slow downward spiral of where we are headed.

    The secular decline of manufacturing must also help to explain the sluggishness of productivity in recent years as the economy becomes ever more reliant on services.

    The government will not help here with the continued austerity background and it may be that what remaining support there is for industry will get chipped away over the next few years and this will impact on future performance, compounding the decline.

    What do we do about it? Well, as you say, this has been going on for a long time and is unlikely to be reversed any time soon, certainly in the context of current government policy. I am of the opinion that we will get a bust in the next few years and there will have to be some sort of reset and it may be that this is the only way we are able to change direction. I realise this might sound like a counsel of despair but, as you say, this decline is not new and the “raffish” view is firmly entrenched.

    • Hi Bob J

      We need to do something different and the Bank of England with its FLS is another failure. I think that it needs to start with schooling and education and the promotion of careers in subjects such as engineering. It was one of my father’s arguments as he trained as a surveyor at a school of building and we seem to have abandoned that in the rush to send ever more to a university.

      There is a role for government to help things but do any of today’s politicians look remotely far enough ahead? We are in danger of abandoning one of our strengths which is inventiveness.

  3. Carney is bull-shitting again too!
    An interest rate rise of 0.25% should not, in the overall scheme of things cause too many problems, so why not just get on with it?
    Well if banks are still insolvent, and if there is no prospect of any IR increase, because he needs to protect the banksters’ margins, he’ll make all sorts of noises to try to get the effect of an IR rise, without actually doing it.
    I would bet my life on Carney praying that the US does not raise interest rates, and that “circumstances preclude an interest rate right now, but probably in the summer”.

    • Hi therrawbuzzin

      That is a good point! Perhaps the last person who wants to see Janet Yellen and the US Fed raise interest-rates is Mark Carney. it would call his bluff……

      Actually I do think that the banks are still deleveraging and have yet to tell us the full truth.

  4. “But as you can see it has slowed and more recently it has gone negative (ironically as overall UK productivity has picked up). So questions remain and we seem unable to escape the mistakes of our past. What can we do about it?” – Do we need t do anything about it? UK manufacturing is in terminal decline because the UK is and has been poor at making quality things on a mass production basis cost effectively.

    Therefore it fails and emerging markets (where they can make reasonable quality products) and Germany (where they can make high quality things) thrive.

    Is it the end of the world if the UK manufacturing sector (which is poor anyway) withers away?

    • yes actually it does , a third world nation will be that all’s left , like Somalia.

      we the people , that being HMG and the Big Financials , bet the farm on us being a service economy that would supply financial “products” back in the 80’s to the world.

      due to the “stunning” level of compentence of UK managers we know how that tunred out

      375billions —- and what did we do to the last car maker we actualy owned ? Rover group was sold off bit by bit until all we had left was a big shed and 6000 out of work employees .

      The fab five walked off with fat pensions pots …

      And until we can get some good , German style , managers , you know ones who know the business and worked their way up , ( yes there are some UK ones , but they are a minority ) we will never make a comeback. Ever.

      think about those figures 54% exports from 11% manufacturing base .

      think then of Japan , doesnt seem to matter much if you can’t balance the books as a government , so long as you make stuff that people want.

      Still gotta laff , here have some popcorn , because what ever you or I say doesn’t matter , if the top wonga’s are doing their Britishs manager’s best then , hey ho , just watch the show with me 😉

      Forbin.

      Dire Straits – money for nothing and your checks for free

      • You may rue the demise of Uk industry Forbin, but the reality is they can’t make much that the World wants so better to accept this reality and look to develop in ways that lead to the creation of services that can be exported.

        The US appears to have it sewn up with computers via Microsoft and Apple but you never know in an innovative field like IT where things can change quickly.There may be other service areas the UK can excel at. I was around in the 70’s and 80’s and strongly disagreed with the fantasy of a financial services based economy simply because it was too concentrated and narrow an offering, but no -one listened and everything I predicted at that time has come true, it just took about 25 years to arrive.

        The one good thing was a realisation that the UK can’t make things. The bad thing was an inability to realise another potential answer was to re calibrate the education system towards value added engineering and design and to take long term views on investment decisions. Oh and to reward merit instead of the nepotism and rewards to sycophants and people whose “face fits” that has been rife in the UK certainly since the 70’s. Asd I’ve become older I view it as a bizarre tragi-comedy, albeit a boring one because I can nearly always predict the next moves so I distract myself with gaming the CB’s, making a killing and eating candy floss (popcorn isn’t my thing)

    • The capability to manufacture is not a national trait, especially since our history is riddled with engineering geniuses.
      The problem, and the ONLY problem is, and always has been capital.
      Lack of investment and expectations of too high returns on what was invested, led to obsolescence and poor industrial relations.
      Services tend to be capital-cheap.

      • indeed , reminds me of the old get out clause or excuse I used to hear at lot

        we’re making a profit – we don’t need to invest in new product or features

        we’re making a loss – we cant afford to invest in new product or features

        the disc brake for motorcycles was offered to the British motorcycle industry – they rejected it as too costly and nobody needed it

        the Japanese took it up and the rest is industry

        it isn’t just capital , although I agree that the British elites have never liked the money made by the upcoming industrialists , seems the old school is winning

        back to Harry Harrison’s Homeworld for the future picture of the UK …..

        Forbin

      • Insufficient capital investment combined with unrealistic time horizons for generating a return is part of the manufacturing process – and the UK has failed at that process in terms of R & D, re-investment in plant and machinery and in education via lack of qualified engineers and scientists exiting University.

        • Hi Noo2

          It is a bit like the school report “must try harder” isn’t it? We need to set a long-term plan for factors such as education as whilst I agree we have our weaknesses at mass production more niche products can suit us.

  5. Shaun, it was a report of a conversation between Blai and Scroder witnessed by Michael Steiner, Schroders foreign policy advisor. Apparently Schroder told Blair quite bluntly that he just didn’t understand economic matters at all and that he didn’t ‘get it’. I wish Blair had listened to Schroder ! There was also the famous comment by the German finance minister to Gordon Brown when he said that you are building an economy based on cutting each other’s hair but we (the Germans) still prefer to make things!

  6. Yes Shaun, a great time to return to the real micro-economics of manufacturing. Just as the baby-boomer retire and a replaced by cohorts of younger workers brought-up on the internet and controlled play areas. It is difficult to even fathom how these new workers will deal with a collapse of any service economy that they been told to worship. We shall see.

  7. Pingback: So Bank of England who will vote for an interest-rate rise after today’s data?! | Notayesmanseconomics's Blog

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