Manufacturing must lead the recovery

During the depths of the recession in 2009, it was clear that recovery in Britain would mean a shift in the way the economy operated. Rebalancing is the buzzword used by analysts and policymakers. The consumer sector, which accounts for more than 60% of final spending, remains bogged down by debt and worried about job security and the impact of inflation and higher taxes on spending.

The public sector, of course, is undergoing a period of retrenchment, with spending curbed and jobs disappearing. These were the two areas of the economy that underpinned growth up to 2008, and it will take years to unwind the legacy of the excesses of those years.

So, with the consumer and public sectors constrained, it has to be the corporate sector that leads the economy back to health, and if the domestic market offers limited opportunities, business has to look to exports for additional sales. The sector with a significant global reach is of course manufacturing – the activity got left behind in the years of robust growth that preceded the recession.

Despite the apparent fragility of the UK’s output growth, it is encouraging that manufacturing has led the way. In the 12 months to the first quarter of this year, manufacturing grew by 4.7%, compared with the 1.8% rise in GDP. Over the same period, services increased by just 1.4%. Trade in goods (excluding oil and erratics) jumped by nearly 20% between the first quarters of 2010 and 2011, and the haemorrhaging of manufacturing jobs appeared to have been stopped by the end of last year.

This encouraging trend, if the usually reliable PMI surveys are to be believed, seems set to continue in 2011. The responses to the monthly surveys have been above the key 50 threshold (implying expansion) for nearly two years, and results in recent months have been the highest for 15 years. Yet for all the good news, manufacturing output remains over 8% below its pre-recession peak.

Many people will find it hard to believe the UK’s short-term prospects and longer-term prosperity depend on manufacturing. It is a widely held view that Britain’s manufacturing base was packaged up and sent to China in the 1980s, and we have since endured a prolonged period of de-industrialisation. But the official statistics reveal that UK manufacturing’s output reached its all-time historic peak, not in the 19th century or even the 20th century, but in 2007. The sector turned down a bit earlier than services or construction, but it had been growing steadily for years.

The growth of manufacturing, however, was much slower than in areas such as financial services, distribution or property and construction, and so its share of GDP has been falling for years. It currently accounts for just 12.8% of the economy. But manufacturing’s decline has been relative rather than absolute – a long-term trend that might be about to turn.

Today, manufacturing is different from the old ‘smokestack’ industries of the previous generation, and reviving the sector does not mean bringing back belching factory chimneys and armies of unskilled workers in flat caps riding to work on bicycles. Where old manufacturing was about being cheap, new manufacturing is about being smart. Old manufacturing produced goods in bulk; new manufacturing focuses on added value.

In the modern world, advanced industrial countries such as the UK have to develop activities that are knowledge, science and technology-intensive, and goods and services that trade internationally on the basis of quality and/or uniqueness rather than price.

The UK is not a low-wage economy and so will rarely be the lowest cost producer of anything. There were clear signs in Chancellor Osborne’s second budget that the government understands this agenda (the Chancellor said he wanted to see more ‘Made in Britain’) and this should be the next important issue once the public sector finances have been repaired. ?