The economic effects of oil prices shocks on the UK manufacturing and services sector

This paper investigates the relationship between changes in oil prices and the UK’s manufacturing and services sector performances. Only a few studies have been conducted at the sector level: the goal of this paper is to contribute in that direction. After presenting review of existing literature about oil effects on the UK’s sectors of manufacturing and services, an econometric analysis is carried out. In a more detailed analysis, three sets of vector autoregressive (VAR) models are employed using linear and non-linear oil price specifications among several key macroeconomic variables. From the linear oil price specification VAR model, the impulse response function reveals that oil price movement causes positive effects in both the output of manufacturing and services sectors. The variance decomposition shows that oil prices are quite important as a cause of the variance of the UK services sector output, while they do not have such a large role in the variance of the UK’s manufacturing output. From the asymmetric specification, it has been found that positive oil price changes determine a consistent contraction in manufacturing output, while the services sector does not seem to be affected by increases. Alternatively, negative oil price changes, show that manufacturing output does not increase so much despite a decrease in oil prices. The services sector is much more affected by oil prices decreases than increases. Finally considering the net oil price increase (NOPI) specification, it has been found that the manufacturing sector is much more affected by oil price changes than the services sector.