This month’s Key Indicator looks at the state of manufacturing in the UK and globally and by all indications, it is struggling everywhere.
While the proportion of manufacturing as a part of individual national economies varies all economies depend on trade with each other and in an interconnected world a slowdown in one place can have a significant impact on others.
China is currently the No 1 in the world in terms of manufacturing output valued at $2,010 billion representing 27% of national output. USA is second ($1,867, 12%); Japan third ($1,063, 19%); followed by Germany ($700, 23%); South Korea ($372, 29%); India ($298, 16%); France ($274, 11%) and Italy ($264, 16%). The UK trails these countries in ninth place with $244 billion manufacturing output representing 10% of national output.
Poland meanwhile has the highest percentage of its workforce employed in manufacturing, followed by Germany, Italy, Turkey, and South Korea.
In the UK, manufacturing makes up 11% of GVA, 44% of total UK exports and directly employs 2.6 million people. In fact, in August according to IHS Markit/CIPS the UK manufacturing sector fell to a seven-year low.
The CBI (Confederation of British Industry) monthly survey showed that manufacturing order books fell in September to -28 from -13, well below consensus expectations of -16%. While food, drink and tobacco and mechanical engineering drove positive growth, metal manufacture, metal products and textiles and clothing pulled in the opposite direction.
However, figures everywhere over the last few months make grim reading.
IHS Markit’s latest snapshot for September of Germany’s manufacturing growth, where a score under 50 signals contraction, slid to 41.4, the worst reading since June 2009. In fact, the entire Eurozone is experiencing a contraction, according to official data from Eurostat, the statistical office of the European Union in Luxembourg.
In China, Reuters reports that growth in industrial production in August was at its weakest in more than 17 years while in the USA, too, the New York Times reported that in August the manufacturing sector contracted again as it had in July, albeit manufacturing accounts for just 11-12 percent of the country’s gross domestic product.
What is causing the current state of manufacturing in the UK and globally?
In a word, uncertainty is the theme everywhere, but while the primary causes may differ around the world, in many ways the underlying reasons are politics and market economics.
There are two ongoing conflicts: 1. between those who advocate stimulating economies and those who believe we should live within our means; and 2. between those who believe in market forces and those who seek to control them whether by tariffs, duty, currency control or exchange rates.
In September the USA introduced yet another set of trade tariffs on Chinese imports as part of the ongoing trade war launched by US president Donald Trump. The question is what next as tariff talks between the two are due to resume in October.
In the UK, clearly, the ongoing uncertainty is primarily over when, if or whether the country will finally resolve its various dilemmas over leaving the EU at the end of October as Prime Minister Boris Johnson continues to promise.
Manufacturers anticipate that output volumes will fall briskly over the next quarter and that output price inflation will accelerate in the next three months, above the long-run average. Anna Leach, deputy chief economist at the CBI, said: “UK manufacturers have become noticeably gloomier in September.”
However, arguably the three-year Brexit wrangle has had its repercussions well beyond the UK as manufacturing supply chains are so closely interwoven across the EU. The effects of the reduced value of £Sterling against the Euro and other currencies has added significant costs to importing of raw materials and components, which has had a significant impact on the automotive industry particularly.
There is little sign that the politicians will shift their stance on the big issues but the one element that so far does not seem to have been factored into the arguments is the effect of climate change and the damage to the environment.
This is an issue that has become so pressing that it is just faintly possible that it could prompt a radical rethink in the way businesses trade globally, the way goods are manufactured and what goods will, or should, be made in the future, and above all on how national and global economies should measure economic success.
Perhaps this presents an opportunity for SMEs to come up with new and innovative ideas that will promote sustainable growth without the endless competition that currently seems to dominate the discussion?
