May 29, 2011 9:54 pm

Hopes for growth in manufacturing

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Amid the gloom associated with Britain’s economy, manufacturing has been one bright spot.

Last year, against the trend of the past four decades, factory production as a proportion of gross domestic product increased slightly from 11.4 per cent to 11.7 per cent, according to the IHS Global Insight consultancy.

The rise followed a history of production falling or staying stable as a share of national output for virtually every year since 1970. The only two exceptions, besides last year, were in 1989 and 1994 – helped as now by sterling’s weakness.

The rare upward movement has encouraged hopes that – as part of a broad “rebalancing” – manufacturing can rise in a sustained way in the next few years to account for a larger slice of GDP.

David Cameron defined rebalancing in broad terms at a Commons committee hearing earlier in May.

He said he wanted to see growth “coming from manufacturing, investment, exports, rather than believing we can just reflate the economy on the basis of property, government spending and a consumer boom”.

The prime minister de­clined to provide more details or say whether he wanted to see manufacturing expand faster than services.

Stephen Radley, head of policy at the EEF manufacturers’ association, said he was not too concerned by any vagueness over “rebalancing” as it clearly implied the need for a “healthier” manufacturing sector.

Chart: Waiting for the upturn

George Buckley, UK economist at Deutsche Bank, said: “Britain has allowed goods production to fall too far. The more total UK output is spread across a number of sectors, the stronger the economy is likely to be.”

In the first quarter, the year-on-year growth of manufacturing was 4.7 per cent, after 5 per cent in the final quarter of 2010 – a much better performance than for the economy as a whole, which was in a state of near stagnation.

Exports have been growing relatively quickly, helped by sterling’s 15 per cent devaluation against other currencies over the past three years.

As to whether special measures are needed, among the sceptics is Nick Crafts, an economics professor at the University of Warwick. He said that due to sterling’s fall, manufacturing as a percentage of output was set to rise automatically in the next few years, with an increase in exports and fall in imports. Taking further steps – for instance, by introducing “protectionist” measures to aid UK-based companies – could easily do more harm than good.

However, David Green, the director of Civitas, a policy research group, said the government was being “negligent” in talking about a rebalancing towards manufacturing but not doing enough to help.

“I’d like to see a range of measures, including changes in the tax structure to give more incentives for investment, a reduction in energy costs and setting up a state-funded bank explicitly to help manufacturing,” said Mr Green.

Sir Alan Rudge, chairman of the ERA Foundation, a technology research and investment group, highlighted the UK’s manufacturing deficit, which last year amounted to 4.7 per cent of GDP, compared with 2.9 per cent in 2000.

“We should be worried about whether it is possible to attract the necessary inflows on a sustainable basis to finance deficits of this size,” said Sir Alan. “Increasing the size of the manufacturing industry is one of the obvious ways to do something about this.”

Some worry that due to the relatively poor record of UK-based manufacturers over the past 20 years, not much change could be expected – whatever new policies were directed towards the sector.

John Wood, former president of the Institution of Mechanical Engineers, shrugs off such doubts. He thinks ministers should set a target of 20 per cent for manufacturing’s share of output in the next few years. “Then we should try our hardest to achieve it.”


Fall from grace

The UK’s position in the world of manufacturing has fallen dramatically over the past 40 years, writes Peter Marsh.

It fell from fourth biggest maker of factory items in 1970 to number nine last year – not only behind France and Italy but Brazil and South Korea.

In 1970, measured in current year prices, manufacturing was 32 per cent of UK output, and 32 per cent of employment. Last year it was just under 12 per cent and 10 per cent.

The UK accounted for 2.3 per cent of global production in 2010, down from 4.1 per cent in 1970.

This reflects the weak performance of UK-based manufacturers but also the rise of industry outside the main “industrialised” countries.

In 2010, 41 per cent of global manufacturing took place outside the main “developed”, with half of this coming from China, compared with 27 per cent in 2000.

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