Merryn's Blog

Good news – Britain's economy is finally rebalancing

The UK economy is hardly at its healthiest. But one sector is doing remarkably well - manufacturing. And with many companies shifting their business from China, this much-longed for 'rebalancing' looks set to continue.

Flip through the papers from the last week and you might think that the UK had already slipped back into the depths of recession. The nation's commentators still haven't recovered from the (possible) fall in GDP at the end of last year and the new dip in house prices has been given endless inches everywhere (including here of course) as has the possibility that low growth will mean another round of tax hikes. "Middle classes face £4bn tax bombshell", says the Mail.

But amid the misery something has been missed. It is the fact that the UK economy might just have started to do exactly what we all say we want it to do. It is rebalancing. We are moving albeit slowly away from our dependence on ever-rising house prices and a consumer debt bubble and, thanks in good part to the 25% odd drop in the value of the pound since 2007, towards a future in which manufacturing is to play a part.

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Manufacturing was the strongest component of the last round of GDP numbers (up 1.4%) and the monthly purchasing managers' index (PMI) for the manufacturing sector showed that activity expanded at the fastest rate in the survey's 19-year history last month. The PMI data, compiled by CIPS/Markit, showed a reading of 62 for the first month of 2011. When it is over 50, the sector is expanding at 62 it is expanding quite fast. So fast in fact, that order books are rising at record levels and output is back up to mid-1990s levels.

A letter in the FT yesterday made exactly this point. Francis Evans of Bromyard Engineering writes in to say that, having gone on short hours during the downturn, "all staff are now back on normal hours and we will soon need to invest in extra capacity to meet demand." And you can see the same sort of comments on our own website too last week specialist engineering contractor John C wrote this here: "We outsource most of our manufacturing to fabrication companies that have the facilities for CNC laser cutting, CNC rolling and automated welding. In the last few months the workloads of all the companies in our area have expanded to the point where they have closed their order books. Some companies are even accepting work orders from Germany due to capacity constraints there. The signs are that economic activity is picking up strongly in the basement."

Will all this good stuff go on? It might. My interview with Terry Smith in this week's magazine includes a discussion we had about the way in which China is pricing itself out of some manufacturing markets, and I've come across several people in the last month who say that once you take shipping and quality into account, they are better off having their stuff made at home than in the East. With sterling still weak we are likely to hang on to that cost advantage for a while.

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So far our manufacturing sector clearly isn't big enough or strong enough to pull us out of recession alone. But it is making an excellent start. We wanted an economy that was skewed towards making and exporting stuff rather than just consuming stuff and it looks like we are starting down the path of getting one. I would call that cause for celebration and good reason for the coalition to stick to their guns in their efforts to reduce the size of the state.

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