North Sea Oil Weighing Down British Economy

The output of oil and gas from Britain’s North Sea energy sector, plus disappointing export numbers, are beginning to weaken manufacturing in the kingdom and threatening the new Conservative government’s efforts to improve the overall economy.

Manufacturing appeared healthy at the start of 2015, but orders and production have diminished so far in the second quarter, mirroring to some extent the reduction in North Sea output caused by the plunge in oil prices during the past year. The British manufacturers’ association, the EEF, says the industries most affected were mechanical engineering and metals.

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The latest quarterly report by EEF – which once stood for the Engineering Employers’ Federation – said the problem also has affected the British industrial morale, leading to a reduction in investment and employee recruitment. The conclusions are based on a survey of more than 400 companies.

Certainly the fall in energy prices has been both good and bad news for British industry. For example, Mark Carney, governor of the Bank of England, has described the phenomenon “unambiguously positive” for the economy by controlling costs.

But the EEF report shows its unfavorable impact on the supply chain that manufacturers rely on. In the survey, the manufacturers pointed to a decline in demand over the past three months, particularly due to falling orders for British energy. Its source is primarily from the North Sea, which has become less productive over the past 15 years.

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“Manufacturers are marching to a slower beat in 2015,” Lee Hopley, EEF chief economist, explained in a statement. “Manufacturing is still growing, just not at the pace anticipated at the beginning of the year. The sector is still in positive territory, but the ground is looking a lot less firm beneath its feet. Much of this weakening is down to the impact of the decline in oil and gas activity on the supply chain.”

Despite an encouraging start to 2015, the Office for National Statistics reported May 28 that the British economy grew by only 0.3 percent in the first quarter of the year, its slowest rate since the end of 2012. In part, the report said, that was due to the country’s widening trade deficit.

Now the EEF forecasts an even broader weakening of the economy, expecting that manufacturing will expand by only 1.5 percent for the year, down from a previous estimate of 1.7 percent and merely half the growth of 2.9 percent during 2014. Overall, the group downgraded British economic growth for this year to 2.6 percent from a previous forecast of 2.8 percent, which would have equaled growth in 2014.

The report is especially bad news for the new Conservative government, which won a clear majority in the May 7 elections and so can rule without having to form a coalition. Its most convincing election campaign theme was that it would rebalance the country’s economy away from domestic consumer spending and toward manufacturing and exports. So far, though, the economy hasn’t cooperated.

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Nevertheless, there is some optimism about Britain’s economic track. “There was a lot of uncertainty in the run-up to the UK election with few predicting such a decisive outcome,” Richard May, a partner at DLA Piper, which worked with the EEF on the report, told the Financial Times.

“Whilst the overall outlook for the manufacturing sector is still one of growth, hopefully a majority government and the promise of increasing economic stability will boost confidence and have a positive effect on manufacturers in the second half of the year,” May said.

By Andy Tully Of Oilprice.com

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