MANUFACTURING SECTOR IN FREEFALL

09 Jan 09. Figures released today by the Office for National Statistics showed a sharp drop in production in November. The output of the production industries fell by 2.3 per cent in November from October, the steepest monthly fall since June 2002 and far deeper than the -0.6 per cent consensus expectation. This was the ninth consecutive month of decline – meaning that production industries continue to be in a deep and serious recession. Over the year to November, production fell by 6.9 per cent, the sharpest year-on-year decline in over 28 years.

Manufacturing production fell by 2.9 per cent month-on-month, bringing the year-on-year decline to 7.5 per cent, the lowest since 1981, when real GDP was declining by more than 2.0 per cent, inflation was in the double digits and Tony Benn was challenging Dennis Healey for deputy leadership of the Labour party. The most significant decreases in output were 6.2 per cent in the chemicals and man-made fibres industries, 5.3 per cent in the transport equipment industries and 4.6 per cent in the basic metals and metal products industries.

In other news, the output price index for home sales of manufactured products rose by 4.7 per cent in the year to December, compared with a rise of 5.1 per cent in the year to November. The index was unchanged between November and December, ending a four month streak of monthly declines in manufacturing prices. A rise in the prices of tobacco and alcohol products caused by increases in excise duties partially offset the continuing decline in the price of petroleum products, which have seen a 7.4 per cent fall in the year to December.

Today’s data points towards an ugly fourth quarter growth figure following the revised 0.6 per cent quarter-on-quarter contraction in the third quarter. The manufacturing sector is clearly struggling with few businesses looking to invest at this stage of the economic cycle. After yesterday’s historic interest rate cut to 1.5 per cent, future interest rate cuts, although likely, will have increasingly less effect at the margin, although the impact of the 350 basis point cut over the last four months will take time to feed through. However, government action to stimulate bank lending must be the priority for a manufacturing sector in freefall.