Friday, 4 April 2008

Where did our factories go?

Ten years of New Labour meant ten years of destruction for our manufacturing base. As soon as Blair and his crew entered government, UK manufacturing went into decline.

Since 2001, UK manufacturing has been in two prolonged recessions; the first was in 2001-2, while the second occured in 2005 (see dark shaded areas in the chart below). Meanwhile, financial services invariably grew at real rates of 5 percent or higher. It has been ten glorious years for banking, while manufacturing has almost frozen to death

Why has manufacturing growth been so poor? Profitability in the sector is rather limited. Moreover, it has been in constant decline ever since New Labour were elected.

The social implications of this decline in manufacturing are all to evident in the employment data. Today, just over one in ten workers in the UK actually make things, while over 20 percent of the workforce are in the money lending business.

Does the decline matter? During the last ten years, the UK appears to have done well by focusing on financial services and downsizing its manufacturing capacity. For years, people have been complaining about this decline and UK has somehow managed to survive on banking, retail and tourism.

Maybe it doesn't matter. Perhaps the UK can survive as a mega-offshore banking centre. However, the booming financial services sector has not bridged our external deficit. Last year, we managed to run up a deficit as large as the English Channel.

This chart scares me. It is even more frightening that our mad housing market data. What will it take to narrow our external current account deficit? There are two possible answers, either we export more or we import less. The first answer is definitely preferable to the second. However, what sector will generate additional export earnings?

Will it be more banking? The world is currently witnessing an unprecedented credit crisis with many firms de-leveraging and shrinking. UK banking activity will not fill that hole.

Could it be manufacturing? No, that opportunity passed us by a long time ago. There is virtually nothing left of our old manufacturing strength.

Well, it looks like we will just have to cut back on our imports.


Anonymous said...

Eventually the UK will be competitive again for manufacturing. Germany managed it. With the rampant inflation in India and China, they can't hold on to their position forever.

But it'll take alot of time and alot of pain.


cws said...

Nick, pain, pain and more pain and then we will competitive again.

Anonymous said...

What would we manufacture though? everyday plastic items such as toys, bins etc etc can all be produced in China at a much more competitive rate. Japan and Germany have more or less covered the car and electronic/mechanical engineering products. Green technology would be one market that could be exploited and perhaps incentives such as the abolishing of student fees for science based degrees could be offered.

Perhaps we could become the worlds entertainers, our leaders seem hell bent on making us a laughing stock so it wouldn't be too difficult.


traderboy said...

much as i'm happy to bash labour/blair/brown, i dont think blaming them for a manufacturing decline from 1997 is right. that was right around the time that the internet came onto the scene, increasing pricing transparancy and i'm sure making it easier to facilitate cross-border trade.

like Nick said, eventually inflation in india/china, and also falling wages and prices in the UK, will eventually make it worthwhile manufacturing in the UK. Just look at the US...much lower wages than the UK, and a weak currency, and many countries from europe are relocating to the US (esp car manufacturers) to make stuff. hence the (non-oil) trade deficit falling rapidly.

Anonymous said...

We can't subsidise degrees for people who might become useful to the economy once they graduate.

That would be unfair to all the Gender Studies and Social Work majors.


Anonymous said...

2007 was the first year since 1978 that we became an oil importing nation - that's gonna have a big impact on balance of payments.

Anonymous said...

Sadly the NuLabour vision for us all seems to have been that our national economy will be based on selling over priced coffee and property to each other rather than actually make anything to export...

The fragile house of cards is falling down.