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Why is UK Manufacturing Shrinking?

This month brought the news that the seasonally adjusted  Purchasing Managers’ Index fell below the critical no-change mark of 50.0 for the first time in over three years. The announcement has come at a particularly stressful period for Britain’s economy, with a great deal of attention being paid to the state of British steel, amongst other industries. Nevertheless, it came as something as a shock to most, with the popular narrative suggesting that Britain’s economy is stronger now than it has been in some time. So, what’s caused the UK’s manufacturing economy to shrink?

Crucially, this isn’t merely a blip in a period of medium term growth. Following on from a period of sharp growth in 2013, the UK’s manufacturing PMI has been falling steadily, hovering around that 50 mark before rising slightly in 2015 only to now drop down to 49.2 in April. It’s a worrying trend for the economy, which cannot live on the strength of its strong service sector forever. Also important, manufacturing output has been falling significantly too, with consumer goods feeling the brunt of the force, falling to below 50, along with investment goods – an important UK export.

Companies who took part in Markit’s survey attributed the deterioration in their businesses to a combination of weakening demand domestically and a reduction in new business coming from overseas.

Those are very believable suggestions. The world’s economy is in a state of some panic, with China seeing a period of economic decline much worse than was predicted and Europe still struggling to climb to its feet. In that markets, businesses are beginning to reel back their spending habits, leading to a softer demand.

As for a reduction in overseas business, blame has been laid on a number of factors. Uncertainties regarding the oil & gas industry, retail sector and the upcoming EU referendum have led many overseas clients to play a game of ‘wait and see’ with the UK – fact borne out by new export orders falling for the fourth straight month.

Another bad sign for the manufacturing industry is that job cuts were reported for the fourth successive month, with the rate of decline at the fastest it’s been since February 2013. That indicates businesses are recognising tougher times ahead. Encouragingly though, the vast majority of the job losses were found in large companies, with small and medium businesses recording a gentle increase in jobs.

This has all been weighed down by the continued issues surrounding Britain’s steel industry. Over 15,000 jobs are at risk within the steel industry, with many more jobs at risk further down the supply chain, like stainless steel fittings and BSP fittings companies, who rely on the strength of British strength to succeed.

There are, however, some green shoots for the industry. An enquiry is taking place into China’s steel subsidy practices and the government are planning action to help this struggling sector. Will it be enough? Only time will really tell.

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