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.
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.
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.