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Rebalancing act

by Lee Hopley / 19 Jun 2012

Manufacturing has a big part to play in righting the economy, says Lee Hopley

In his 2011 Budget statement, George Osborne called for a “march of the makers” – an economic revival and rebalancing led by manufacturing. That may have seemed like a tall order for some commentators; after all, as a share of the UK’s total economy, the sector is a slimmer version of the one we knew a few decades ago.

That said, with the growing woes in the UK’s biggest market and the lacklustre growth figures from the Office for National Statistics over the past year or so, it remains a good time to reflect on why the chancellor’s call over a year ago is an important now as it was then.

Firstly, the international focus of manufacturing, and the sector’s capital-intensive nature, is still what’s needed as far as rebalancing goes. As consumers and government spending necessarily take a big step back from the growth picture in the coming years, exports and investment will need to step up and plug the gap.

Manufacturing is innovative, and that’s also good for our economy in the long run. Almost three-quarters of all business expenditure on research and development (R&D) takes place in the manufacturing sector. This innovation underpins productivity growth and ensures that we compete on value rather than price. And, given the range of significant challenges we face in terms of environmental pressures and demographic changes, we need to generate some of the solutions in the UK rather than relying on buying them from someone else.

Finally, it’s recent performance. UK manufacturing has generally been ahead of the broader economy in terms of growth since the end of 2009. From a sector perspective, activity in manufacturing has expanded by around twice as much as the wider economy. It has been a bumpy few years, but buoyed up by growing global demand, companies – from those that have carved out a competitive niche to those that are part of international supply networks – have seen their output and orders on the increase.

There's no denying that the economic environment for growth is extremely challenging, but there are still many good news stories buried behind the gloomy 'Grexit' headlines, from the 20-man business selling engineering solutions to Taiwan and New Zealand and the consumers-goods manufacturer expanding capacity in its UK factory rather than source from Eastern Europe, to the car manufacturers that continue to commit new capital to their UK operations and are looking for their suppliers to do the same.

Unfortunately, it's not always in these terms that manufacturing is discussed. Debate can quickly move to lamenting our exporters who sell more to Ireland than to the Bric economies, or concerns about why our manufacturers invest less than the Germans do. Only one of these statements is correct.

This matters for a couple of important reasons. Manufacturers need to attract skilled engineers, technicians and designers. The lack of such talent will apply the brakes to our long-term competitiveness, so we must ensure that we present a true reflection of modern industry to encourage people of all ages to aim for a career in manufacturing.

Policy-makers are grappling with a growth challenge. The development of an industrial strategy must start with recognising the strengths as well as the weaknesses of our manufacturing base. Government actions need to go with the grain of the private sector, but its actions through tax, regulation and procurement can, at the same time, promote and penalise export and capital-intensive parts of the economy.

This won’t be enough. Companies have a choice about where they put their next investments – the UK isn’t like the US or China, where companies might feel they must have manufacturing facilities – so something about the UK has to stick out to attract those investments. The government needs the same coherence in its growth plans as there is in its deficit reduction strategy; it needs all departments aligned to meeting those objectives and it needs to demonstrate to manufacturers that it won’t change course. That is, after all, what a manufacturer would do.