Investment in Port Talbot cannot come soon enough, but it might be the last roll of the dice
Sajid Javid, Jacob Rees-Mogg, Greg Clark, Rishi Sunak, Grant Shapps and Kemi Badenoch: the list of Tory chancellors and business secretaries who have sought to unlock the puzzle of the British steel industry’s future in recent years is almost as long as the number of active production facilities remaining in Britain.
And as the issue of steelmaking sovereignty has grown in prominence, so the need to identify a long-term solution to the financial troubles of the country’s biggest producers has grown in urgency.
The fate of Port Talbot, Tata Steel’s vast plant in South Wales, has hung in the balance for years.
Its Indian parent has tabled numerous proposals to secure government investment and made myriad threats (some veiled, others less so) to jettison the perennially loss-making UK business.
During his stint as business secretary in 2016, Mr Javid faced angry steelworkers at Port Talbot, telling MPs days later that “no option is off the table”.
Now, a favoured option at last looks to have emerged.
After months of talks with Tata Steel’s Indian parent about a £300m taxpayer support package, Whitehall appears to have blinked first.
Blast furnace at Tata Steel, Port Talbot
Negotiations over a revised deal that would contribute £500m of public money are, apparently, close to a successful conclusion.
Sources say a deal could be reached within weeks, although given the stuttering nature of previous discussions aimed at reaching an agreement, it would be wise not to trumpet an agreement too optimistically until the ink is dry.
Any deal would be likely to commit Tata Steel to Port Talbot for as long as electric arc furnaces – a greener steelmaking process than the use of blast furnaces – are commercially viable, which in turn would take the question of the plant’s short-term survival off the table for the first time in many years.
It wouldn’t be without cost, though – and not only in terms of the nine-figure sum being provided from the public purse.
Sources close to the negotiations say the government has reluctantly accepted that in return for a long-term commitment to Port Talbot, thousands of job losses will, over time, become necessary.
These wouldn’t be immediate, but well-placed observers say that a reduction in Tata Steel’s UK workforce from 8,000 to around 5,000 is conceivable in the coming years.
That, some will say, is an acceptable price to pay for a key emblem of Britain’s manufacturing industry remaining operational. Others, particularly those affected by future changes, will vehemently disagree.
But with figures from UK Steel, the trade body, showing that last year crude steel production declined to its lowest level since the Great Depression of the 1930s, one thing is clear: an investment by the government in Port Talbot cannot come a moment too soon; but it might end up resembling a last roll of the dice for a proud part of Britain’s industrial heritage.
The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
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The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
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Is Britain going bankrupt?
Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
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Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
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