It is becoming clearer that over the past few years manufacturing has made a massive revival in the south and Midlands and it is the north and Midlands that are starting to suffer from the commodities slowdown that hit Beijing and the financial services sector across the UK.
UK manufacturing recovered strongly from the 2008 financial crisis, climbing to its highest level since 2010 in the second quarter of this year. It is now starting to slide back, but at a slower rate than UK services or construction.
Weakness in manufacturing was a key factor in the Bank of England maintaining its interest rate in the past two years.
Growth in manufacturing has been up and down all year, but the decline is no longer so dramatic as in the first half of the year.
There has been huge divergence in the growth rates between north and south and the Midlands and the south, with southern manufacturing growing twice as fast as northern manufacturing in the third quarter. This compares with a 1.3 per cent divergence in the second quarter.
Southern manufacturing is now growing at a faster rate than manufacturing in the north, which is a remarkable turnaround from 2005 when northern manufacturing was still growing at a faster rate than southern manufacturing. The divergence has reached a level unseen since the industrial revolution, though growth rates are much more modest.
At the other end of the spectrum, the Midlands and the south east have experienced a similar pattern of decline over the past decade, but in the past year that pattern has become more pronounced.
The divergence in regional manufacturing growth between the south-east and the Midlands can be explained by the composition of firms across these regions. The south east has a higher concentration of professional service and financial service companies, but some of the other industries including oil and gas and manufacturing are strong. The Midlands has a greater concentration of companies in the automotive sector.
This divergence has spread across the central UK. From the north west and North East, manufacturing growth was more closely tied to other industries. Manufacturing growth in the rest of the UK was more closely tied to the oil and gas sector, which had been growing rapidly.
Production in London has been slowing, and is now slightly lower than in the rest of the UK. The south west has been the fastest growing region, but manufacturing growth there is closely tied to other industries. Manufacturing growth in Wales has been weakest, but its industry is strongly tied to other areas with steel and commodities.
The best performing Midlands economies have all been mining dependent. Since oil and gas prices fell, the mining sector has become a rare bright spot in the Midlands industrial landscape. Oil and gas industries have led regional growth in the north west for the past two years, but the growth rate is now rapidly declining as prices continue to slide.
More generally, slower growth in resources industries, particularly in the north of England, has been a major drag on the southern industrial landscape.
Output from finance, insurance and real estate has also collapsed in the region — perhaps a result of private sector deleveraging, and as a result, is no longer one of the main reasons why manufacturing is now growing faster in the south east than the north.
London’s economic driver, banking and finance, has also grown significantly more slowly than manufacturing.
One region that has continued to grow in the face of weaker economic conditions is Wales. The prosperity that the city of Cardiff enjoyed over recent years has not been fully replicated elsewhere in Wales, with Northern Ireland being the only region that saw significant growth in the second quarter.
The only one of the UK’s constituent parts not to enjoy growth, however, has been Northern Ireland. Northern Ireland’s larger economy is driven by manufacturing, largely due to the important role of the motor manufacturing industry. The North’s rapid growth also helped to support the UK economy by lifting the pound. At the same time, it was negatively affected by the slowdown in investment in Northern Ireland as a result of the regulatory and fiscal environment being less friendly to investment than in the rest of the UK.