UK Manufacturing Drops Sharply in February


April 2016

UK Manufacturing Drops Sharply in February

The latest official figures from the ONS show that the UK’s manufacturing sector has hit a slump, with output for February falling to its lowest level in just under three years.

The drop has been led largely by the nigh-collapse of the UK steel industry as production of the commodity is at its lowest level in over seven years. Output from iron and steel manufacturing (considered together as one sector by the ONS) fell by 37.7% in the year to February and pulled down total levels of industrial production by some 0.4% alone.

The plummeting of steel output follows Tata Steel’s announcement of their intention to fully cease operations in the UK in the wake of, among other things, incredibly low import costs from countries like China reducing the cost-effectiveness of domestic production.

Currently Tata is looking for a buyer for its existing plants, in particular the flagship site at Port Talbot in Wales but in the meantime the sector is struggling.

It was not just steel that suffered though; of the UK’s 13 manufacturing sectors, only two experienced annual growth according to February’s figures.

The biggest drop was in transport equipment manufacturing, at 2.9%, though the drop in iron and steel had a larger effect on the total figure.

Total manufacturing output was down 1.1% from January to February; much worse than the 0.1-0.2% drop predicted by most analysts, even with knowledge of the then-impending and now fully underway steel crisis.

On a year by year basis, manufacturing output was down by 1.8% in February –the sharpest drop since July 2013.

The wider category of industrial production – which includes manufacturing as well as utilities and mining – also fared worse than was predicted. Industrial production output was down 0.3% in February, compared to an expected 0.1% increase. Annually, the sector saw a 0.5% drop; while it was expected to be flat.

Alan Clarke at Scotiabank described the figures as “miserable” but his outlook was not entirely negative.

“While the data did not make pleasant reading,” he said, “crunching these numbers still leaves us on track for 0.5% q/q GDP growth during Q1 barring a disaster in the services sector.

“Manufacturing should have a better time once the effects of the weaker pound feed through, as long as pre-Brexit vote uncertainty doesn’t get in the way.”

Samuel Tombs at Pantheon Economics also mentioned the need for the services sector to make up any shortfall from manufacturing and production.

“The industrial slump places more of the onus on the services sector to drive growth, but the weakness in both February and March suggest that all sectors are now struggling.”

The services sector is currently expanding, albeit slowly. The Markit/CIPS services Purchasing Manager’s Index was at 53.7 for March, up from a nearly three year low of 52.7 in February. Anything above 50 represents growth, although the growth was described by Markit as “sluggish”.

Despite this, official data showed that the UK economy did grow by 0.6% in the final quarter of 2015.

The ONS also released trade data, which did not paint a particularly positive picture.

The goods trade deficit sat at £11.96 billion for February; an improvement from January’s figure but still somewhat worse than was predicted by a recent Reuters poll of economists. It is also the worst figure for February since records began. The improvement from January’s figure is down to a £300 million increase in exports, bringing the total value up to £23.2 billion.

The UK’s trade gap with the EU also grew to a record high of £8.6 billion following a 1.1% increase in imports and a 1.3% drop in exports to the bloc.

Overall, the total trade deficit, including both goods and services, sat at £4.8 billion, following a £0.4 billion improvement on January’s figure.