The UK economy is paying the price for the severe imbalance in its economy with the over-emphasis on the financial sector at the expense of the manufacturing. The UK hasn’t recovered from the 2008 Global Financial Crisis with real income per person only increasing 0.2% since its peak in 2007 – this is less than the per person increase in Japan during its lost decades of 1990’s and 2000’s.
What is alarming is that since the GFC the Pound has depreciated by around 30% make UK exports more competitive and imports more expensive. Within most countries a depreciation of this magnitude would give a huge boost to manufacturing sector but in the UK the impact was minimal which is indicative of the state of the sector itself. It is the poor performance of manufacturing that has seen UK’s deficit grow to 5.2% of GDP in 2015.
Although the UK is the 8th largest producer by output value but if you look at the per head output and % of national output it is much further down the pecking order – see table. Also of note is that the UK’s manufacturing output as a % of national output has dropped from 27% in 1970 to 10% in 2013. Although some have tried to play down the role manufacturing sector there has been a fundamental misunderstanding of the role of manufacturing in economic prosperity.
1. Manufacturing is the main source of productivity growth and economic prosperity – machines and chemical processes raise productivity. Also most R&D is carried out in this sector so recent increases in the service sector came about by using more advanced units in the manufacturing sector. This includes fibre-optic cables, routers, more fuel efficient cars, GPS recorders etc.
2. Many knowledge based industries have been around for a number of years – they include research, engineering etc. The vast majority of them used to be conducted by manufacturing firms and have become more visible as they have been ‘spun off’ or ‘outsourced’. Changes in a firm’s organization should not be confused with changes in the nature of economic activities.
It is important to note that the majority of this knowledge-intensive services sell to manufacturing firms, therefore their success is dependent on the state manufacturing sector.
Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.
Source: The Guardian
For the most of 2013 and in his State of the Union address this year, President Obama has supported the idea that investment in the manufacturing sector is a part of the solution to the high unemployment figures in the US. This type of thinking might have worked in the 1950’s when employment in a factory was reasonably accessible but it doesn’t account for the changes to the US and global economy.
The first graph below shows the % of manufacturing that makes up US GDP. Would it be better to focus on services? Do the US have a comparative advantage in manufacturing anymore? Investment in manufacturing does not actually create the jobs that it once did. Would it therefore be better to focus on the service sector industry (education and medical +12.2%) as that has been the growing sector from 2008 to 2013 whilst manufacturing has been in significant decline -12.5% see second graph below.
Steven Rattner wrote in the Sunday Review of the New York Times about the misbelief of a rebound in the US manufacturing sector. Although there has been talk of a new industrial revolution in the US, American manufacturing has struggled to compete as less developed countries have become more adept. In Mexico, where each autoworker earned $7.80 per hour in 2012, auto industry officials say productivity is as high as in the United States, where total compensation costs were $45.34 per hour – see chart below. No surprise then that in 2013, Mexican automobile production was 50 percent higher than seven years earlier, while output in the United States was at the same 2006 levels.
For the United States to remain competitive against countries like Mexico, productivity must continue to rise. But unlike past gains in productivity, these improvements in efficiency are not being passed along to workers.
I picked some interesting statistics from Reserve Bank Governor Graeme Wheeler’s recent talk to the NZ Manufacturers and Exporters Association.
Importance of manufacturing
* share of global GDP fell from 27% in 1970 to 16% in 2010.
* USA 26% in 1970 – 9% in 2008
* Manufacturing employment 62m in 2000 as compared to 45m in 2010
Reasons for the above:
* Global transfer of capital, investment, and technologies
* Competition from Developing Economies – export processing zones with lower taxes and cheap labour.
This trend of relative decline has been common despite differences in economic structures, size and geography, commodity endowments, and exchange rate arrangements and behaviour. For example, since 2000 the real effective exchange rate of the United States has depreciated by 14 percent and manufacturing employment fell by 31 percent.
In New Zealand manufacturing’s share of GDP has trended down:
1980’s = 25%
2012 = 12%