Manufacturing (2)

Something curious seems to be happening with the UK, it is looking a lot more like a manufacturing economy. Is this good or bad; can it last?

The official data confirmed what the surveys said. November was a good month for manufacturing – the sector saw output grow by 0.4 per cent in November on the month before, and by 1.5 per cent in the three months to November compared to the previous three months.

Industrial production did almost as well – but given this includes manufacturing, that is hardly surprising.

Industrial production has now enjoyed it longest run of uninterrupted growth since 1994.

It may come to a juddering halt next month, however, as the key Forties oil pipeline is shut down for repairs, this carries a third of all UK oil output.

Actually, the boom in industrial production that the official data confirms was telegraphed in advance. As reported here, the purchasing managers indexes have been pointing to a resurgent manufacturing sector for some time.

December is not likely to be so strong for manufacturing either, with the purchasing managers indexes pointing to slightly slower growth in the last month of the year, relative to November.

Alas, construction was not so good, although November saw reasonable growth on the month before, in the three months to November, construction contracted by 2.0 per cent. Again, this was forecast by the purchasing managers indexes.

Meanwhile, November saw the UK’s trade deficit widen, but everything is relative, goods export volumes rose in the three months to November while import growth was flat, suggesting a boost from trade to the UK’s GDP in the final quarter.

The purchasing managers indexes have been pointing towards sharply rising exports in the manufacturing sector for some time.

As for the UK economy as a whole, the National Institute of Economics and Social Research (NIESR) has projected that the UK economy grew by 0.6 per cent in Q4, the fastest growth rate since the end of 2015.

Amit Kara, Head of UK Macroeconomic Forecasting at NIESR, said: “We estimate that economic growth recovered to 0.6 per cent in the final quarter of this year from 0.4 per cent in the third quarter. Economic growth has picked up in the second half of 2017 after a period of subdued growth in the first six months. The recovery has been driven by both the manufacturing and the service sectors, supported by the weaker pound and a buoyant global economy, while construction output continues to lag.”

Paul Hollingsworth, Senior UK Economist at Capital Economics said: "With consumer spending appearing to hold up fairly well, quarterly GDP growth of 0.4 per cent or so looks likely, which would see growth in 2017 as a whole come in at 1.8 per cent – barely different from 2016’s 1.9 per cent rise. And looking ahead, while the consensus expects growth to slow to 1.4 per cent this year, we expect growth of about 2 per cent, as inflation drops back and the squeeze on real incomes fades."

Samuel Tombs at Pantheon Macroeconomics was less positive, he said: "Exporters have raised prices to such an extent that UK goods have not gained much competitiveness. Prices for goods exports, excluding oil and erratics, were 14 per cent higher in November than two years previously. As a result, foreign currency prices have fallen by just 3 per cent. For many overseas customers, this discount provides insufficient compensation for the risk that supply chains break down post-Brexit. Export prices might drop this year, if high margins attract firms to compete against existing exporters. But this rebalancing process will be tentative, given the risks that Brexit brings. As a result, we expect net trade to provide only modest support to GDP growth in 2018.”