UK manufacturing in recession despite faster GDP growth | Business

Warmer weather helped the British economy grow at a faster pace in the three months to the end of June, despite official figures revealing the manufacturing sector slumped into recession for the first time since the Brexit vote.

The Office for National Statistics said GDP increased by 0.4% in the second quarter from a rate of 0.2% in the previous three months, helped by stronger retail sales and good weather enabling the construction industry to make-up lost ground from the heavy snow earlier this year.

The better news for the economy comes after the Bank of England lifted interest rates to 0.75% last week, their highest level since the financial crisis a decade ago.

gdp graph

Philip Hammond, the chancellor, said: “We are working hard to build a stronger, fairer economy – dealing with the deficit, helping people into work, and cutting taxes for individuals and businesses.”

Service industries experienced robust growth of 0.5% in the second quarter, with the retail and wholesale sectors providing the strongest contribution, helped by the warm weather tempting shoppers back to the high street.

Gross domestic product (GDP) is a key government statistic and provides a measure of the UK’s total economic activity.

Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction mean the economy is officially in recession.

GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government.

Economists are concerned with the real rate of change of GDP, which shows how the economy is performing once inflation is taken into account.

The Office for National Statistics produces quarterly official GDP figures about three and a half weeks after the end of each three-month period.

The ONS uses three measures and they should, at least in theory, all add up to the same number.
• The value of all goods and services produced – known as the output or production measure.
• The value of the income generated from company profits and wages – known as the income measure.
• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure.

The ONS publishes three estimates of quarterly GDP figures. The first “flash” estimate comes out about 25 days after the quarter in question has ended. The figures usually get revised in subsequent months as more data from businesses and government departments is received. But even the third, dubbed “final”, estimate of quarterly GDP is not set in stone: the Blue Book, which is published once a year, in August, contains revisions going back the last 18 years.

The National Institute of Economic and Social Research’s estimate comes out about three weeks before the official figures.

The ONS also calculates the size of the UK economy relative to the number of people living here. GDP-per-capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. 

However, the latest snapshot from the ONS painted an increasingly lopsided picture for economic growth, with Britain reliant on the services sector amid a downturn for factory output. There were also indications of slowing growth in June, with the ONS revealing May was the strongest month of the second quarter.

The manufacturing industry recorded its second consecutive quarter of negative growth – the official conditions for an economic recession – amid weaker international demand for British goods. While manufacturing output fell by 0.9%, the sector is smaller than the dominant services industry, meaning its drag on overall economic growth was only worth about 0.1%.

The greatest falls in output were reserved for factories producing metal products and electrical equipment, where exports are important. Lee Hopley, chief economist at the EEF manufacturers’ organisation, said the industry could face tough conditions ahead.

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“The autumn Brexit negotiations and related focus on the risk of ‘no deal’ will increase uncertainty,” she said.

Growth in the production industries – which include mining and energy alongside the manufacturing sector – fell by 0.8% as the warm weather cut demand for heating. Maintenance work at the Sullom Voe oil terminal on Shetland in May also cut energy production.

manufacturing sector growth chart

The official figures show trade acted as a drag on GDP growth in the second quarter, suggesting there was no longer a boost for manufacturers from the weak pound – making sales of UK-made goods since the EU referendum more competitive.

Britain’s trade deficit – the difference between imports and exports – widened by £4.7bn to reach £8.6bn in the three months to June, due mainly to falling exports of goods and higher levels of imports.

The figures also show the UK becoming more reliant on the EU for trade, despite the efforts of ministers to drum-up interest elsewhere around the world. Over the past year, exports and imports of goods to and from the EU increased by more compared with non-EU countries.

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