Manufacturing decline ended in January

While the OECD and other forecasters continue to pump out gloomy assessments of the outlook for the UK economy, most commentators appear not to have noticed that the decline in manufacturing activity ended as long ago as January.

While the OECD and other forecasters continue to pump out gloomy assessments of the outlook for the UK economy, most commentators appear not to have noticed that the decline in manufacturing activity ended as long ago as January. Figures released today by the Office for National Statistics confirm that UK manufacturing output has been broadly flat since January, though a jump in July means that it is now 0.9 per cent higher than it was six months earlier. Surveys of business confidence, such as those from the CBI, the EEF and the Chartered Institute for Purchasing and Supply, which are usually strongly correlated with output, suggest that this mini-revival was sustained in August.

The ONS reports that the most significant increases in output in recent months have been in rubber and plastic products, wood and wood products and, particularly, in the transport equipment industries, where output in the latest three months was 6.9 per cent higher than in the previous three. In part, this is simply a reflection of the stock cycle. For a period in late 2008 retailers were meeting demand from stocks and cutting orders to manufacturers, who in turn cut output aggressively. Now stocks are at very low levels and demand is again being met from production. However, credit should also be given to the Government’s £300 million car scrappage scheme, which gives £2,000 to those buying a new car, if they are scrapping one bought more than 10 years ago. This helped lift car sales by 6 per cent over the last year. Furthermore, while it is harder to show a direct link, the cut in the main rate of VAT to 15 per cent, will also have bolstered retail sales and, thus manufacturing output, to some extent.

Of course, the fact that this mini-revival is based on temporary stimulus measures (the car scrappage scheme will run out of money before the end of the year and VAT will be increased back to 17.5 per cent in January), highlights the still fragile nature of the economic recovery and sends a message to policy-makers. It is one thing to hope that demand in the economy will be strong enough to allow output to continue to recover throughout 2010 without the support of such measures; it would be altogether riskier to go further and take demand out the economy through significant tax increases or public spending cuts, or by reversing the quantitative easing policy of the Bank of England.

Data used in the graph is available here.

2 Responses to “Manufacturing decline ended in January”

  1. Shamik Das

    UK manufacturing output rose 0.9 per cent in the six months to July, OECD figures reveal @leftfootfwd http://tinyurl.com/manufacturing-stats

  2. News summary: Wednesday, September 9th | Left Foot Forward

    […] recession is over. Following an ONS release on manufacturing growth, the National Institute of Economic and Social Research report that GDP is […]

Leave a Reply