Sunday, May 06, 2018
Manufacturing's new dawn is starting to look like a falso one
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

When it comes to bright spots for Britain’s economy over the past couple of years, probably the best place to look has been in Britain’s factories. While the pound’s Brexit tumble pushed up inflation and squeezed household incomes, it provided a shot in the arm for manufacturing exporters.

Manufacturing has, additionally, looked like the one part of the economy taking advantage of the strengthening world economy. The upturn in global growth to something close to pre-crisis norms (the pre-crisis norm being 4%), has been good for industry globally, and in Britain. Until very recently, based on official figures, ministers could boast of the longest run of monthly growth in manufacturing since the late 1960s.

This bright spot was to be welcomed, and we should never fall into the trap of thinking that, because of the rise of services, we are now a post-industrial economy and manufacturing does not really matter.

Though manufacturing has a weight of only 10.1% in the official gross domestic product (GDP) calculation, new research suggests it is much more important and influential than that. The research, by the consultancy Oxford Economics for the Manufacturing Technologies Association, suggests the true impact of manufacturing, taking into account its direct impact, its effect on supply chains and the spending power of people employed directly and indirectly in the sector, is equivalent to 23% of GDP. And, rather than the conventional figure of 2.6m people employed in manufacturing, the “true” figure for jobs dependent on the sector is 7.4m, according to the research.

As the report puts it: “Those numbers give a truer picture of the importance of manufacturing to the UK economy. The reasons are clear: over the last 40 years, manufacturing has increasingly outsourced activities which used to be done in-house—in areas as diverse as logistics and catering. There are also companies, from design houses to accountancy practices, whose activity, or at least a large part of it, is predicated on serving manufacturing businesses.”

It is not just nostalgia that has led some people to yearn for a future in which Britain’s factories play an even more important role in the economy, though it is hard to fund any examples of economies in which the share of manufacturing in GDP has risen after a long decline.

Though some visions of Britain’s post-Brexit future, including those set out by certain Brexit supporters, see only further decline, for others hope springs eternal, and for good reason. Compared with the economy as a whole, manufacturing jobs are characterised by higher skill levels, higher productivity, and better pay and job security.

There is also the not-so-small matter of Britain’s trade deficit in manufactured goods. It appeared for the first time since the industrial revolution in 1982 and has not gone away since. Last year it was an eyewatering £97.6bn.

So everybody loves a sustained manufacturing revival, and the economy would be better off for it. The question is whether this has been another false dawn for factories. There have been plenty of these before. George Osborne’s “march of the makers” of a few years ago never got much beyond a gentle stroll. A strong upturn in the sector in 2014 was dealt a blow by the collapse in the oil price, which reduced investment in energy products. One result of this is that manufacturing output has yet to get back to where it was before the financial crisis took its toll; output is currently 1.5% below its January 2008 level.

All good things come to an end and the latest official figures showed that the continuous run of manufacturing growth came to an end earlier this year. Though the context was a very weak GDP figure, manufacturing’s contribution to growth in the first quarter was feeble; it grew by a mere 0.2%..

Perhaps most disturbing was the April purchasing managers’ index (PMI) for manufacturing, released a few days ago. It was expected to show a strong revival, following the weather disruption of March, which affected output at some factories. Instead it slumped to a 17-month low as a result of slower growth in output, new orders and employment. New export business was at a 10-month low.

“While adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance,” said Rob Dobson, a director at IHS Markit, which compiles the survey. “Looking ahead, the trend in manufacturing production is likely to remain subdued. Weak demand meant firms are seeing backlogs of work fall and stocks of unsold goods rise, limiting the need for output to rise in May. Business optimism has also dipped to a five-month low as concerns about Brexit, trade barriers and the overall economic climate remained widespread.”

It is important to stress that the PMI, while pointing towards slower growth in manufacturing, is not suggesting no growth at all. Lee Hopley, chief economist at the EEF, which represents Britain’s manufacturers, says that while last year saw the maximum benefit of stronger global growth and sterling’s depreciation, and the sector grew by 2.5%, some of those effects have begun to fade.

Manufacturers are benefiting from strong demand overseas for capital goods, as a manufacturing investment upturn gains pace. Such an investment upturn is, however, mainly absent in Britain, and that keeps her awake at night.

As always , the range of experiences in manufacturing is a wide one. In the latest official figures the brightest spots were computers and basic metals, with output up by 7-8% on a year earlier. The weakest included electrical equipment, with production down by a similar amount.

The automotive sector, until a few months ago a definite bright spot, now looks troubled, with declining out put and job losses. Car production in the first quarter was down by 6.3% on a year earlier, while commercial vehicle production fell by a worrying 17.9%. Engine production has been strong but showed a 3.7% year-on-year fall in March.

This is an important moment for Britain’s manufacturers. They are holding off investment until the Brexit fog begins to lift and are anything but reassured by the signs coming out of government. Some complain that the government’s much-trumpeted industrial strategy has been shunted into a siding, like many other policy strands.

Manufacturers are weighing up their post-Brexit options amid the uncertainty. Airbus has said that while it will not move any of its existing activities out of Britain, future activities and investment are “open for discussion”.

The hope was that the stronger manufacturing growth of the past couple of years was a new dawn, The fear is that it was a false dawn; a last pre-Brexit hurrah for Britain’s factories. And that would be very bad news indeed.