The shockingly bad snapshot of industry from IHS Markit and the Chartered Institute of Procurement and Supply puts Britain on recession alert. It doesn’t mean a recession will inevitably materialise.
For that to happen, the poor performance of manufacturing would have to be matched by that of the service sector – and, so far at least, it hasn’t been.
Britain was once the workshop of the world but that was all a long time ago and in recent decades the economy has become ever-more service sector-dominated. Manufacturing accounts for about 10% of national output, services about 80%.
But industry is clearly struggling and that matters because of its impact on productivity, exports and well-paid jobs. It’s not hard to see why.
For a start, the global environment is unhelpful. The US-China trade war has exacerbated the slowdown in world growth, with the result that factories everywhere are under pressure to cut production. Germany’s equivalent of the Markit/Cips survey is at an even lower level than the UK’s.
Brexit uncertainty is a second big factor, with firms mothballing investment in the run-up to the 31 October deadline for the UK’s departure from the EU. There is also some evidence that multinationals are shifting production to protect supply chains against possible disruption.
In the buildup to the original March date for Brexit, manufacturing output received a short-term boost as firms stockpiled goods to ensure any disruption was kept to a minimum. There is no sign of a repeat this time, largely because firms have kept the stocks they amassed in the first quarter.
In the US and the eurozone, central banks are coming to the aid of industry by cutting interest rates, and it will not be long before the Bank of England follows suit. Manufacturing, which contracted in the second quarter and will do so again in the third quarter, is in recession, even if the wider economy is not.
Lower interest rates are by no means a panacea but factories are badly in need of a boost. An end to Brexit uncertainty and a trade armistice between Washington and Beijing cannot come a moment too soon.
