Manufacturing to end year strongly despite weak October

Subscribe to Campaigning blog feeds

Published

ONS data released today showed that the Index of Production (IoP) fell by 0.1% between September and October, as manufacturing activity dropped by 0.7%. However, monthly IoP data is highly volatile and yearly figures show strong growth in production, with manufacturing responsible for the lion’s share of that growth. Total production output is estimated to have increased by 1.1% over the year and manufacturing by a solid 1.7%.

The October drop in the monthly IoP figure effectively wiped out the steep increase seen in September. Looking at the broader picture, manufacturing IoP has essentially stayed flat since July. This mirrors increasing uncertainty in the global economic outlook and weakness in key export markets during the second half of the year. This trend is in line with EEF’s Business Trends results where after a very strong start to the year manufacturing output is seeing a slowdown in the last two quarters.

 

 IoPdec14 

 

Why the H2 weakness?

The drop in the October IoP was by and large down to a decline in manufacturing output. This reflects the export-intensive nature of the industry as poor growth in key export markets, most notably the Eurozone, has been bearing down on manufacturing towards the end of this year.

The story is very much an international one. UK manufacturing growth over the last year has outperformed the Eurozone, including Germany, Italy and France, but quite some margin. However, as the Eurozone remains the UK’s largest trading partner, faltering demand and industrial production there is weighing domestically.

As such, the strong year for UK manufacturing has hinged on strong domestic demand and a re-gearing of exports towards the fast-growing North American market. Domestically, a soft inflation environment in input prices both in terms of materials and fuels has helped boost production. This means that despite international uncertainty manufacturing is set to record its strongest pace of growth since 2010.

 

Sectors a mixed picture

Variation in the manufacturing sub-sectors performance can be mostly explained through their exposure to domestic versus export markets. On a monthly basis, there was growth in five out of the thirteen manufacturing sub-sectors, compared to eight out of thirteen for the year to October.

IoPsectors 

The food & drink sector provided the largest upward contribution to the monthly figures as strong household consumption has been driving growth in the UK market. This is also true for the year as a whole with the food & drinks sector growing by 8% since October 2013.

The strongest counterbalancing force has been the pharmaceutical products sector which has contracted by 9.2% on the year, as over 60% of its exports are going to the underperforming European and Central Asian markets. Another factor for this decline is the expiration of patents for UK pharmaceutical products during the last couple of years. This has opened up international competition in the sector but its impact should soften going forward.

For October, the electronics sector was the biggest drag on growth seeing a decline of 5.4% from September 2014 and making a negative contribution of 0.21 percentage points to total production. Electronics production has suffered from a slowdown in Germany which accounts for 10% of total UK electronics exports. However, the monthly fall came on the back of a 5.5% increase in the previous month and the sector has grown by a solid 6% over the year

Author

This person has now left EEF. Please contact us on 0808 168 1874 or email us at enquiries@eef.org.uk if you have any questions.

Other articles from this author >
Online payments are not supported by your browser. Please choose an alternative browser or make payments through the 'Other payment options' on step 3.