Weekly Economics Analysis by Lloyds TSB

With the volume of world trade dropping fast and global growth measured at market exchange rates set to contract by about 1%, its worst performance since 1945, it is no surprise that global industrial
production is falling sharply.

With the volume of world trade dropping fast and global growth measured at market exchange rates set to contract by about 1%, its worst performance since 1945, it is no surprise that global industrial
production is falling sharply. The countries most affected by this fall in world trade growth, and therefore seeing the biggest falls in industrial
production, are not surprisingly those economies most exposed to international trade. This includes the UK, where industrial production in the year to November was down by 7% and is likely to have
fallen by an annual 8% in December when those figures are released later this week. Other countries are even worse off, but we concentrate on the UK in this briefing.

A global downturn is hitting industrial production in most countries…
IMF figures show that world trade and industrial production are falling very sharply, see chart a. This suggests quite a bleak future for UK manufacturing output, with a weaker exchange rate unlikely to help boost exports at a time when global export volumes are declining so sharply. And this at a point when the global financial crisis is likely to set back output growth in the UK services sector more severely than in many other countries. The reason is that UK firms have been at the forefront of global trade in the financial instruments most affected by the current financial crisis, and so, coupled with the deregulation, the UK’s services sector has grown much faster than its manufacturing sector, especially since 1994, see chart b.

This suggests that, if growth in services is significantly slower as expected, then the strong likelihood is that UK overall economic growth will also be well below the average of the last decade, when annual average growth in real (inflation-adjusted) terms was 2.9%. The chart suggests that the vast majority of the growth in the UK economy for well over a decade has come from the services sector. And it is unlikely that this could be replaced by any other industry any time soon.

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