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.