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Fastest fall in UK manufacturing since January 1981

According to the Office of National Statistics, manufacturing output fell by 2.9% between December and January, which was much faster than previously forecast. In the three months to January 2009 manufacturing output decreased by 6.4% compared with the three months to October 2008. This means that manufacturing was 10.4% lower than the same period a year ago. The changes in manufacturing over the past ten years can be seen in the figure below.

Source: ONS

Source: ONS

 

The downturn in manufacturing was widespread and not limited to particular industries. The most significant falls in output, looking at the last three months to January, compared with the previous three months, were in the transport equipment industries, down 10.8%; basic metals and metal products, down 11.4%; and, machinery and equipment, down 9.8%.

 

This all points to a far faster contraction in GDP than previously thought. It is expected that the first three months of 2009 may show a fall even greater than the 1.5% drop experienced in the last quarter of 2008. In fact, the research firm Capital Economics is now forecasting a fall in GDP of around 4% for the whole of 2009. If this materialises it would be the biggest fall in the UK economy since 1931.

 

The manufacturing sector is concerned that the government is pouring huge amounts of money into rescuing the financial sector, but on the whole are allowing manufacturing to sink or swim on its own. David Kern, the chief economist at the British Chambers of Commerce claimed that: “The critical priority is to ensure that the vital skills base is not lost during this recession. Urgent measures are needed to help viable and well-managed firms hold on to their trained and skilled employees.”

 

In using the words “viable and well-managed firms” David Kern is obviously accepting the premise that economic downturns weed out the least productive companies as should happen over an economic cycle. However, in parts of the EU governments are beginning to subsidise wages to allow for short-time working. Given the high levels of unemployment pay which would follow on from increased redundancies, it probably makes sense to pay to keep workers in work, maintain the skill base and wait for the global storms to subside.

 

Although sterling continues to fall against other major currencies it does not seem to have helped manufacturing that much. I have previously noted evidence that exporters have used this decline in the exchange rate to boost their margins by raising their prices in sterling. However, Amit Kara, an economist with UBS says that “demand prospects are significantly more important for export demand than the exchange rate – five times more.”  Therefore it is obvious that global demand must pick up before we can see a big impact from exports.

 

The only good news is that this is a stage of the recession where firms cut back hard on production in order to run down their existing stocks. As soon as these start to run low we will see a pick up in production.

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Posted in GDP, Manufacturing, recession, UK industry, Uncategorized

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