Why the UK economy is stubbornly flatlining

Britain’s economy is almost flatlining, having grown just 0.1 per cent in November following two months of shrinking.

While most sectors of the economy grew, such as construction and services including retail and hospitality, production slumped by 0.4 per cent, led by a fall in manufacturing, according to the Office for National Statistics.

The production of pharmaceutical products, paper, machinery and food products all fell, adding to the decline, the stats said.

Why is manufacturing shrinking?

Rising energy prices and other high costs have made the UK uncompetitive for factories and industry has been shrinking slowly for some time. Between 1960 and 2015, manufacturing employment in the UK fell by more than 0.4 per cent per year, according to the IMF.

But there have been recent signs too. Today’s news comes days after a warning from Britain’s top industrialist and one of the country’s richest people, Sir Jim Ratcliffe, who said chemical manufacturing in the UK is facing “extinction”.

Sir Jim spoke after Ineos, his firm, last week closed the last remaining synthetic ethanol plant in the UK; the chemical is used in medicine and cosmetics.

The Ineos chairman said: “We are witnessing the extinction of one of our major industries as chemical manufacture has the life squeezed out of it.”

Ineos said 10 large chemical plants in the UK have closed in the last five years with no new sites to replace them.

A key issue is energy prices, said Sharon Todd, chief executive of SCI, a charity founded in the Victorian era to bring innovation and scientific developments to Britain’s once-mighty industry.

“We have to deal with the energy costs whether its steel, glass or chemicals,” she said. UK big businesses pay the most when compared to western EU members, according to government figures. In 2023 large industrial companies paid 93 per cent more than the average of these countries, which include France, Germany and Italy.

But she said the sector also feels forgotten as more focus was placed on the services sector, which encompasses everything from banking and insurance to retail, education and media.

“There needs to be a perspective change and an understanding that this sector is part of the national infrastructure,” she added. “I think it’s at a critical point,” she said of the chemicals industry. “We really have very little left in the UK.”

What has closed?

In 2022 a fertiliser plant in Cheshire owned by CF Industries closed, with the loss of 283 jobs.

And last year, Japan’s Mitsubishi closed its UK methacrylate plant at Teeside, which made chemicals for plastics, with more than 200 jobs lost.

The UK has also lost in recent years many steel companies and much of its motoring industry. Vauxhall’s owner said last year that its Luton van factory also faces closure.

How can you save manufacturing?

Chemicals are used in everything from clothes to consumer products, medicines, food, and defence, and manufacturing jobs often pay well, says Ms Todd.

To save the industry, the government will probably have to choose which areas to focus on, cut electricity costs and also think about the resilience of the chemicals sector.

Since the lockdowns of Covid, companies have been reminded that losing a supplier can be fatal, since production lines will be halted until a new one can be found.

Expensive car production lines sit idle if no seats or steering wheels turn up.

Industry should probably consider how to avoid this, perhaps by merging with suppliers to be come more resilient.

“It needs a long term plan and an understanding of how the pieces fit together,” said Ms Todd. She said that she hopes the new government’s industrial strategy offers some help to the chemicals industry and manufacturing more broadly.

Gareth Stace of lobby group UK Steel, an industry also under threat, said power prices could help his industry regain competitiveness.

The global market for steel is currently very difficult, he said, but China is ramping up production and Britain is only supplying less than a third of its own steel.

“We pay more for our electricity than France and Germany and the rest of the world,” he said, “That makes an uncompetitive business market and our competitors can compete in our own market better than we can.”

How bad is Britain’s economy now?

Mr Stace says that the UK’s steel industry is in as bad a place as it was during the 2016 crisis where a number of smaller players went into administration amid collapsing steel prices.

“I think 2025 will be a very challenging year,” he added.

Britian’s steel makers have to pay grid connection charges which French and Grman competitors don’t have to, something the government could change, said Mr Stace.

He is also concerned about a proposal for pricing zones for electricity, where areas of abundant cheap green energy, like Scotland and its offshore wind farms and hydro power, have cheaper power. This could push up prices for steel makers even further.

A combination of high energy costs, proposals around higher costs for some areas and high carbon costs look bad for the sector when it comes to attracting investment, he said.

Britain is not alone – the German economy, which is highly reliant on manufacturing, has entered its second year of recession.

An end to cheap natural gas from Russia and weaker demand for its cars from China has been depressing its growth for some time.

But Britain’s industries can’t rely on bad news elsewhere to bail itself out, said Ms Todd. Quality jobs are on the line now, she said.

“Often those jobs are in diverse parts of the country and they are very stable with good employers.”