Peston's Picks

Nationalising Tories

• Robert Peston
• 9 Jan 09, 01:33 PM

If there was even a scintilla of doubt that we're in a very painful recession, that doubt must be eliminated by the release today of statistics on manufacturing output and industrial production in November.

These were truly shocking.

The seasonally-adjusted output of all UK production industry in the penultimate month of last year was a staggering 7% lower than in the same month of 2007.

For the smaller group classified as manufacturers, the fall was even worse, at 8% year on year.

Of course it's true that industry is not as big a proportion of the British economy as many would like it to be. But it contributes around a fifth of our entire economic output.

And that fifth of the economy is contracting at an annual rate of 8%.

The picture is even more alarming when examining the manufacturing figures in more detail, and looking at output in the three months to the end of November compared with the previous quarter.

There were falls in 12 of the 13 manufacturing sectors. Worst hit were wood and wood products, which was 6.7% lower in that quarter; transport equipment, down 5.7%; and basic metals, also 5.7% lower.

Only the relatively recession-immune food, drink and tobacco sector recorded an increase - though its rise was an anaemic and statistically insignificant 0.4%.

As for the 77% of our economy that's represented by assorted services: well, many of those - such as our banking and financial businesses - are in a conspicuous mess.

That said, the pre-Christmas hysteria about the meltdown of retailing was overstated (though the shopkeepers have themselves to blame for this hysteria, with their characteristically neurotic seasonal gloom about their prospects).

The true story of non-food retailing is that it was generally bad in the run-up to Christmas, but lethally bad only for a few. Those stores perceived to offer staggeringly good value performed better than the rest (yesterday's figures from cheap-and-cheerful Peacocks were particularly impressive). And food retailing was the exception to the generalised fall in sales.

However, forecasters who have been estimating that the UK economy contracted by an unpleasant 1% in the final quarter of last year may turn out to have been optimistic.

But to return to manufacturing for a second, this country will pay a heavy price for years to come if this economic contraction leads to a permanent loss of firms and productive capacity.

We've learned to our cost the perils of being exceedingly dependent on growth from the City, from financial services. It would be a double indignity if an economic crisis created in the financial sector should wreak the most harm on manufacturers - and make our economy, and our prosperity, even more dependent on services.

So it's more than a small mercy that those horrible job cuts announced yesterday by Nissan are being implemented in a way that should not lead to an irreversible loss of skills and shrinkage of its manufacturing potential.

Even so, there's a role for government, to prevent the chronic shortage of credit in the economy - which is the precipitator of our misery - from wreaking devastating harm on viable firms.

The Treasury has already announced taxpayer guarantees to support £1bn of bank lending to small businesses and a further £1bn of working-capital finance for small exporters. And it's working on a more substantial scheme that would involve taxpayers sharing in the risk of much more lending to companies.

What's finally announced won't be trivial. But the Tories complain that the government has been too slow and unambitious in providing such succour.

The shadow chancellor, George Osborne, today called for a three-pronged strategy to stimulate the flow of credit: state insurance for £50bn of lending to business; a cut in the cost of the capital that's been provided by the Treasury to banks and also a reduction in the fees levied for guaranteeing interbank lending; and a new Bank of England facility to swap corporate loans for cash.

This would amount to a substantial extension of the nationalisation of the credit-creation process - and Osborne acknowledges that more draconian nationalisation may yet be necessary.

It's quite something when the Tories complain that a Labour-controlled Treasury is being too cautious in rolling back the boundaries of the private sector and too feeble when pumping up the role of the state.

Update: Apparently I was the only person in the UK who had never heard of Sportacus. My shameful ignorance ended yesterday when I met this rock-solid pillar of the crumbling Icelandic economy on Simon Mayo's 5 live show. Click below to see me going to LazyTown.

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