Hang on a minute. That wasn’t meant to happen.
That seemed to be the reaction of many commentators to the news last week from the Office for National Statistics (ONS) that manufacturing shrank in February by a whopping one per cent.
That’s the largest monthly fall for ten months, putting factory output some 1.4 per cent down on the same period last year. The figure actually represented the lowest level of manufacturing production for some 20 months. What’s worse is that the ONS also rewrote the January figures, announcing a 0.3 per cent contraction in manufacturing in January, not the 0.1 per cent increase it had previously announced.
This poor manufacturing news appeared to come out of the blue for many. Most economists had predicted a 0.1 per cent increase, and recent PMI figures and survey figures had all pointed to manufacturing growth gathering steam, rising confidence and a much more positive outlook.
Cue much scratching of heads – as one analyst commented: “It doesn’t feel right… it doesn’t really go with the big grain of the surveys.”
That latter survey evidence comes from the Purchasing Managers’ Index (the PMI), the EEF, the British Chambers of Commerce and the CBI; they all paint a picture of a sector that is firmly on the up.
Take the manufacturing PMI which hit a 10-month high in March. Some will no doubt say that such surveys are a much better take on what is really happening than ONS data, as they look forward and also match the positive assessments of the Bank of England.
But with manufacturing output having dropped for four out of the past five months, it’s much less easy to write off the February manufacturing figures as some sort of error in seasonal adjustment which will be revised up later. Many recent revisions to ONS data have in fact been in the down direction. So what’s going on?
The key point is that far from being a driver of growth, manufacturing overall has struggled of late.
Some areas of manufacturing such as the car industry have indeed done very well so far this year but other sectors have struggled. In fact, the month-on-month fall in manufacturing output was driven by big output falls in particular in the rubber and plastic sectors as well as transport equipment. These were likely to have been negatively affected by the recent spike in oil prices. Overall, nine out of 14 manufacturing industry sectors fell.
Commentators expecting robust growth figures had failed to appreciate the diversity of the manufacturing sector.
In addition, while some specific firms like JLR are doing very well in targeting big growth markets beyond the eurozone like China and India, the UK still exports more to Ireland than the BRIC countries combined and is far too eruozone dependent. That eurozone economy is stagnating under the weight of austerity. Add in weak consumer demand at home given the continued (albeit slowing) squeeze on real incomes, and it’s no surprise that British based manufacturers remained cautious in January and February, with limited investment and a reticence to build up stock levels too high.
So the ONS figures probably do give an accurate picture of where manufacturing was in January and February.
Meanwhile the more forward looking measures such as the PMI do show things improving in the future, in part because the eurozone situation has stabilised to some extent (for now at least) after a particularly bad period late last year, and in part because of the most recent news showing the US economy picking up strongly. Confidence does seem to be returning to much of the sector.
So things do look better if you look ahead, assuming no further eurozone crisis or oil price spikes. Some analysts, though, seem to have mixed up forward looking indicators (which are, well, forward looking) with the reality on the ground in the first couple of months of the year.
Overall, the figures do illustrate the fragility of the manufacturing sector. And as I’ve noted before, the danger with the government’s economic strategy is that it has simply assumed that headline low interest rates and the exchange rate depreciation we’ve experienced will deliver a manufacturing rebound that will rebalance the economy and provide the growth we need. That depreciation can anyway soon be unwound, and in itself may not be enough.