What's really happening with UK manufacturing?

http://www.guardian.co.uk/business/economics-blog/2012/apr/05/whats-happening-uk-manufacturing

Version 0 of 1.

Somebody is getting it wrong about UK manufacturing. The picture is rosy according to the survey evidence, with purchasing managers, the EEF, the British Chambers of Commerce and the CBI all painting a picture of a sector that is, if not in rude good health, then definitely on the mend.

The official data tells a different story. February's 1% drop in output was a big shock to the financial markets, which had expected the Office for National Statistics to announce an increase in manufacturing activity. It represented the lowest level of production for 20 months. All of a sudden, talk of chunky growth in the first quarter of 2012 seemed premature.

It is tempting to say that the surveys provide a more reliable guide to what is going on: they are forward looking, they don't suffer from the problems of seasonal adjustment that make life tough for the ONS, and they tally with the anecdotal evidence from the Bank of England and other agencies suggesting that demand for UK manufactured goods is relatively robust.

Even so, the official data deserves to be taken seriously. Output has now fallen for four of the past five months, which makes it less easy to dismiss the February drop as a one-off caused by poorly calibrated seasonal adjustment. Despite some evidence that UK firms are starting to target the faster-growing markets of Asia and Latin America, the main export market remains the deeply troubled eurozone. Weak consumer demand at home may have resulted in UK firms taking an ultra-cautious approach, keeping inventories low and production chains short.

A way, perhaps, to square the two views is that the surveys could well be reflecting a more upbeat mood in manufacturing since the depths of Europe's sovereign debt crisis late last year. The sense of relief, together with signs that the US economy is picking up, has resulted in firms laying plans to increase production over the coming months, even though these have not yet been reflected in the government figures. And may never be if, as has seemed entirely possible this week, the respite for the eurozone proves to be short lived.