As manufacturing output declines 0.9pc, will the economy ever lift off?

Britain’s makers and metal-bashers are not in a happy place. Manufacturing might be small when compared to Britain’s dominant service sector, but it still counts. This brings us to the latest official figures, showing that the economy caught a winter cold and decided to stay in bed in January after December’s surprisingly sprightly performance.

To be fair, no one was expecting much. The regular Reuters poll of economists anticipated an expansion of 0.1 per cent. But the fact that UK plc did the opposite, contracting by the same number, will still come as a major disappointment to a government that has put growth above all but is struggling to find it with any consistency.

The dominant service sector more or less held up, inching forward with growth of 0.1 per cent, but the makers’ mucked up the numbers, recording a 0.9 per cent decline. With construction also falling (0.2 per cent), Britain’s economic hokey-cokey – two steps forwards, two steps back – continues.

Here’s where it gets really unpleasant. The first quarter economic survey from Make UK, the manufacturers trade body, comes out on Monday – and I understand that the figures will be very weak, with both orders and output in the red.

What makes this stand out is that the first quarter of the year is usually a good one for the sector. The last time it was in a trough was back in 2016, nearly a decade ago.

This isn’t terribly surprising when you consider that the organisation’s business confidence indicator fell at the fastest rate since the pandemic in the final three months of last year. But it is a bad look.

You’ll have guessed by now that chancellor Rachel Reeves’s Autumn Budget, and the decision to hike employer national insurance contributions (NICs) in particular is one of the big villains of the piece. It looks increasingly like an act of self-harm.

A separate Make UK survey in January in response to that Budget showed recruitment being frozen at best, with a significant number of companies planning redundancies. Investment plans were being delayed or cancelled. This is becoming a familiar story across British business.

Chief executives and finance directors aren’t going to put their firms’ money at risk by investing unless they feel confident in doing so. The fact that the relationship between business and the chancellor has turned sour quicker than a celebrity marriage has played a major role in its disappearance.

However, to simply blame the chancellor for the sector’s woes would be over-simplistic. Markets globally are riven by uncertainty and fear, with the threat of Donald Trump’s tariffs hanging over everything. Export markets have also been weak for some time, especially in Europe, where growth is anaemic at best (excepting Spain). Germany, the economic engine, has been mired in recession.

The forward-looking Purchasing Managers Indices (PMIs) for European manufacturing have been below 50, with anything above indicating growth, for some time and, despite Brexit, the EU still takes roughly half of the UK’s exports.

There should be some relief coming in the second part of the year, when Reeves’s debt-funded investment spending starts to come on stream. But what manufacturers would really like is a long-term industrial strategy with some real oomph behind it. The latter is something which has been notably lacking. Theresa May broke the ice by finally recognising that simply leaving it to the market wasn’t going to work. But there has, since then, been a lot more talk than action.

Make UK would like a ten-year programme with clear metrics attached so its success or the lack of it can be monitored. It would include action to address the skills gap – a persistent and naggingly stubborn problem – and improving the ranking of the sector’s robotics density for digitalisation among other things.

“There is a perfect storm of factors affecting our sector at the moment economically and politically and there are no easy answers,” says Make UK. But there are still political choices that could be made to help.

There is a corps of people who like to argue that it is time to give up the manufacturing ghost. Britain’s days as a power are long gone. Services are what we’re good at – we should focus on those. These figures will likely have them nodding sagely. But they’re wrong. A mixed economy is best served by having several strings to its bow. And the service sector can clearly look after itself.

If the government wants an end to a sluggish stop-start economy it is time to recognise this and put some effort into addressing the issues that it can address. Restoring confidence and building back the trust that has been lost would be a good place to start.