British manufacturing slumps

Britain’s manufacturing output fell by 6.4% in the three months to January, official figures show. The Office for National Statistics (ONS) says the latest results were 10.4% lower than the same period a year ago. Output decreased in 12 out of the 13 sub-sectors.

The most significant decreases were recorded in the metal industries (11.4%), transport equipment (10.8%) and in the machinery and equipment industries (9.8%). The ONS says output only increased in the sub-sector that includes coke, refined petroleum and nuclear fuels.

Britain’s total production output decreased by 5.6% over the last three months, and by 9.6% compared with a year ago.

Jamie Dannhauser, an economist at Lombard Street Research, says the manufacturing figures are “no surprise” to him. He says that for manufacturers the global trade rout combined with a savage squeeze on margins last year has caused material damage. This is demonstrated by the latest slump in production.

“This goes hand in hand with the latest export figures because manufacturing exports make up about two thirds of the UK’s exports,” he says.

The ONS reports a deficit on trade in goods and services of £3.6 billion in January, compared with the deficit of £3.2 billion in December 2008.

Dannhauser says that world trade volumes, particularly the high-value added goods in which British firms specialise, have plummeted. And companies were hit by a large and unexpected squeeze on their margins, despite healthy price gains for British exporters.

“Normally, the falling sterling makes those companies serving the domestic market more competitive,” says Dannhauser.

But rather than allow their foreign currency prices to decline, many British firms selling into foreign markets instead decided to raise their sterling price and support their profitability. However, he adds, even this does not appear to have been enough to prevent a significant squeeze on margins.

The surplus on trade in services was £4.2 billion, compared with a surplus of £4.0 billion in December, the ONS says.

The deficit on trade in goods was £7.7 billion, compared with the deficit of £7.2 billion in December. Exports fell by £0.8 billion, and imports fell by £0.3 billion.

The ONS reports that the deficit with EU countries was £2.0 billion in January, compared with a deficit of £2.9 billion in December. Exports rose by £0.6 billion and imports fell by £0.2 billion.

The deficit with non-EU countries widened to £5.7 billion compared with the deficit of £4.3 billion in December. Exports fell by £1.4 billion while imports were virtually unchanged.

Dannhauser adds that the doom and gloom among industrial firms is balanced by better news from retailers and evidence of an improving housing market.

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