x Abu Dhabi, UAETuesday 23 January 2018

UK manufacturing might not be dead, just resting

Figures for last month show renewed activity in the UK manufacturing sector, despite observers tirelessly parroting that the industry has long dropped off its perch.

Driver's seat: the British government is hoping that exporters will carry the economic recovery as they tap into rising demand.
Driver's seat: the British government is hoping that exporters will carry the economic recovery as they tap into rising demand.

The Archers, the BBC Radio 4 rural drama, was 60 years old last week.

The radio soap opera celebrated its birthday with high drama but it has always remained true to its roots.

The programme began broadcasting in the UK in the 1950s, with the aim of informing farmers of the latest agricultural techniques, at a time when food was still rationed.

In recent months, there have been calls for an industrial equivalent to convince schoolchildren and young people that manufacturing and engineering have come a long way since the days of blacksmiths and ship building.

The British manufacturing sector was pronounced dead a long time ago. From ship builders on the Clyde to British Leyland car workers in Oxford, the story was that the patient was a goner , unable to compete with the low-cost East, its heart sold to foreign owners.

And yet, there are more than just a few signs of life in the old corpse. In the first few days of after the New Year comes data that showthe UK's manufacturing activity raced to a 16-year high last month.

It was a spectacular end to the year for the sector, which the government is relying on to sustain the recovery and to create jobs.

However, as with most indicators, the purchasing managers' index of factory activity had a sting in the tail. Material costs, particularly for energy and metals, are surging at their fastest rate since 1992.

The figures are fuelling growing concerns about inflation and add weight to calls for an increase in the UK's ultra-low interest rates.

Rates have been held at a record low of 0.5 per cent since March 2009, despite inflation running well above target.

The rationale is that most of the above-target inflation is caused by one-off factors and that a large amount of spare capacity remains in the economy.

And that is why the expansion of manufacturing activity, while welcome, still needs to be absorbed with a pinch of salt. Manufacturing, which accounted for about a third of the British economy in the 1980s, now represents only 12 per cent.

As for the wider economy, Britain's output remains 3 per cent below pre-crisis levels. The latest figures from the services sector, which makes up three-quarters of the economy, show that it shrank last month, the first slowdown since April 2009. According to research by HSBC, Britain would need growth of 6.2 per cent a year over the next two years just to get back to its previous trend.

The government may be hoping that exporting manufacturers will carry the recovery as they tap into rising demand in emerging markets - but it will not be easy. Beijing has just raised interest rates by a quarter point, showing concern that the Chinese economy is in danger of over-heating.

And while the British government has insisted that it wants to see the economy here rebalanced away from financial services towards manufacturing, many have interpreted this merely as another way to chastise the bankers.

Questions over the government's commitment to manufacturing were raised when it emerged it had dropped a key paper that was intended to spell out its strategy for the future of British manufacturing. The Manufacturing Framework was shelved before Christmas in favour of a "call for evidence" on the best ways forward for British industry.

Professor John Bryson, of the University of Birmingham's School of Geography, Earth and Environmental Sciences, who was behind the call for an "Archers for industry", says the real problem for the sector is that it is in greater danger of expiring from a shortage of talent, rather than from Chinese competition.

Prof Bryson argues that companies often struggle to attract qualified applicants, in part because of the out-of-date notions of what constitutes manufacturing.

Certainly, the manufacturing sector is not going to sit back on its laurels because of several months' of satisfactory growth.

But the continuing divergence between the services sector and the manufacturing sector is causing a real headache among the rate setters at the Bank of England. There is no easy answer to this, particularly as sales tax increases, this month, start to take hold.

Manufacturing may be back on its feet, but it is far too early to pronounce the patient fully recovered.