The Office for National Statistics (ONS) is responsible for collecting and publishing statistics related to the economy, population and society at national, regional and local levels. The latest release of economic statistics includes details of gross domestic product (GDP) for the latest quarter (April to June). GDP is important because it measures the value of goods and services produced in the UK and estimates the size and growth in the economy.

For the second quarter, ONS revealed that the UK’s GDP grew by 0.4% in comparison to the first quarter of 2018. This growth figure was fuelled by growth in the service industries and construction, which benefited from the warm weather, rebounding from a difficult winter period due to the heavy snow. However, a 0.9% contraction in the production industries (manufacturing, mining and quarrying, energy supply, and water and waste management) contributed negatively to GDP growth. Overall the growth figures were in line with expectations, but should the production industries be worried?

Key sub-sectors affecting performance

Within the Index of Production, the manufacturing sector was the key worse performer and contributed a negative growth rate of 0.9% for the quarter, with April appearing to be a particularly tough month. The manufacturing sector is smaller than the dominant services industry (contributing 0.42 percentage points to overall GDP), meaning its drag on overall economic growth was only about 0.1%. However, this will be a concern as this is its second consecutive quarter of negative growth, meeting the official conditions for an economic recession.

A closer look at the breakdown in growth within the manufacturing sector indicates that although growth was not bad throughout, there were falls within 8 of the 13 subsectors. The greatest falls in output were in machinery and equipment, metal products, and electrical equipment which had growth rates of -4.5%, -4.6%, and -6.4% respectively. There was some growth within the sector, however, with pharmaceutical products and computer, electronic and optical products growing 2.4% . In previous releases ONS had flagged a slowdown in output from the sector over the latter part of 2017 and the beginning of 2018, so these figures will not come as a shock to business’s within the sector.

ONS cite a potential reason for the 4.5% fall in growth for machinery and equipment between Q1 and Q2. Their responder-led evidence suggested that there was more impact during Q1 2018 from the erratic nature of infrastructure projects, which bolstered growth, compared with Q2 2018.

Furthermore, Britain’s trade deficit widened from £4.7 billion to £8.6 billion in the three months leading up to June 2018, due mainly to falling goods exports and rising goods imports. It has been suggested that this is a factor affecting metal products and electrical equipment sub-sectors of manufacturing where exports are particularly important.  A fall in exports to non-EU countries and a rise in imports from EU countries significantly contributed to the trade deficit. The country that contributed most to the decrease in exports of machinery and transport equipment sub-sectors was the United States including Puerto Rico, followed by India and the United Arab Emirates. According to the Society for Motor Manufacturers and Traders, car exports dipped by 1.9% in May.

Comparing Q2 2018 with Q2 2017 shows the Index of Production has surprisingly risen by 1.4%, and ONS credits this primarily to a rise in manufacturing of 1.3% for that period. This longer-term examination of GDP gives a far more positive view of the manufacturing sector’s growth, and could be a more reliable gauge of performance, as month on month growth rate data can be volatile.

Will more funding help?

On the same day that ONS released the Q2 statistics, Chancellor Philip Hammond unveiled £780 million of new funding for high-tech industries. This is part of the governments ambitious, modern Industrial Strategy. This new funding backs Britain’s brightest talent, supporting work in high-tech labs, cutting-edge factories and advanced training centres. This certainly has the potential to have a highly positive impact on the manufacturing sector.

Despite the manufacturing sector’s overall growth contracting 0.9%, here at MPA we’ve seen how R&D investment made by companies within this sector has fuelled growth and success. Manufacturer and supplier of digital finishing equipment Morgana Systems is one such case. Morgana’s regular innovation through both development of existing products and the creation of new products is what keeps them at the forefront of their industry. This has also allowed them to capitalise on growing international markets, such as China, contributing to the UK’s exports. Innovation is an essential driver of economic growth that benefits consumers and businesses. New ideas and technologies developed and applied improves the UK’s competitive advantage on a global stage, as demonstrated in the 2018 Global Innovation Index, which ranked the UK 4^th this year; an impressive increase from 5^th place last year.

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If you work in the manufacturing sector,  get in touch today to talk to our team about how you could be funding your innovations.