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Monday, 6 August, 2001, 12:58 GMT 13:58 UK
Q&A: The manufacturing recession


What are the latest figures?

According to the Office for National Statistics, the UK manufacturing sector - factories and firms which make things - has shrunk in size for a second consecutive quarter.

This means it is now officially in recession.

Does that mean the UK as a whole is now in a recession?

No.

But pain felt in the manufacturing sector, which accounts for about 20% of the economy and about 4 million jobs, has been spreading to other parts of the economy.

The figures have not come as a surprise to economists or manufacturers, who have been struggling for some time.

But the service sector - shops, financial services, restaurants etc - continues to grow and it is has kept the whole UK economy out of recession thus far.

What is a recession?

When an economy which has previously been growing shrinks for two consecutive quarters, it is in recession.

This means factories are producing less than they were before - and less income is being generated by service sector industries.

As the slowdown becomes more severe, workers are laid-off and consumer confidence collapses, adding to the cycle of decline.

Why is UK manufacturing in recession?

It is the victim of a slowdown in the world economy.

This has been led by a dramatic collapse in the previously booming market for electronics and telecoms equipment, such as mobile phones and masts.

Big British companies such as Marconi, which have invested millions in the telecoms equipment market, have suddenly found themselves with few orders and a huge pile of unsold stock.

Foreign-owned companies such as Motorola and Ericsson have also been hit by a downturn in demand and forced to lay-off thousands of workers.

Britain has been hit harder than most countries because of the continued strength of the pound, particularly against the euro.

This makes all British-made goods more expensive in foreign markets, making it difficult for Britain's manufacturers to compete.

But there is also a problem of long-term decline in British manufacturing - and some have even questioned its future viability as a manufacturing centre.

Between 1995 and 1999, UK manufacturing's share of Gross Domestic Product (GDP) fell faster than in any other country in the G7 group of industrialised nations.

Does the manufacturing slump matter, if service industries continue to boom?

There are few signs of a recession in Britain's shopping malls and high streets.

The housing market is also enjoying something of a boom, with prices going up at a rate of 11% a year, according to a recent survey.

But Britain's factories have been struggling for some time.

The fact that Britain's manufacturing sector is relatively small compared to most of its competitors, means it has proportionately less of an effect on the rest of the economy.

But economists have warned that the country's "two-speed economy" - with the service sector booming and manufacturing in decline - cannot continue indefinitely.

And if people continue to spend - and borrow - at an ever greater rate, the greater the crash will be when it comes.

Does this mean Britain is heading for a full-blown recession?

The jury is still out.

The big fear is that the slowdown in manufacturing will leak into the rest of the economy.

There are signs that this has already started to happen, with service sector confidence - and orders - well down.

More than 100,000 people have lost their jobs in manufacturing in the past year.

Many of those people will be spending less as a result - and the credit they took out while they were earning good money will become more of a burden.

At the same time, talk of a recession in manufacturing could dent consumer confidence in general.

People may have secure jobs in banking and finance or the retail sector, but they will start to feel less secure.

They will delay buying a new car or upgrading their home computer until worries about a recession have passed.

But while interest rates and inflation remain low - and consumer spending does not collapse - there is a chance that Britain will avoid a full-scale slump, of the type seen in the early 1990s.

Much will depend on the state of the world economy.

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 ON THIS STORY
The BBC's Dharshini David
"No sector is an island within their economy"
See also:

06 Aug 01 | Business
UK manufacturing in recession
03 Aug 01 | Business
Gloom spreads to UK service sector
30 Jul 01 | Business
Consumer credit boom continues
02 Aug 01 | Business
US manufacturing slumps further
02 Aug 01 | Business
US factories struggle for trade
30 Jul 01 | Business
Profit warnings set to increase
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