Manufacturing is the key to rescuing Britain from low growth crisis

Posted on 31 Jul 2023 by The Manufacturer

The UK’s economy is in a state of chaos. The past year has exposed how vulnerable our economy is and how much more susceptible we are to global events compared to other countries. Living standards are dropping at alarming rates and existing inequalities are deepening even further. It is no secret that we are in a perilous position and we must find a solution that will prevent another scenario like this happening again.

In my latest pamphlet, Rescuing our Economy, I put forward my argument on how we should do this. Namely, how we can strengthen our economy through growing GDP rather than obsessing over inflation rates and how important it is that manufacturing is a key part of this rebuilding process.

It is no coincidence that the manufacturing sector is also at one of its weakest points in history. The British economy was built on our ability to manufacture high-quality, desirable products at competitive prices. Communities were formed around local factories and factory work provided a core identity for people in all corners of the country. Unfortunately, the government has lost sight of the importance of manufacturing, and our country is suffering for it.

I believe that the government should change the Bank of England’s mandate from controlling inflation to growing GDP. How will we grow GDP? Manufacturing must be at the heart of any economic policy, investing in the sector and creating the conditions that will make British-made goods competitive internationally. It’s the only way we can turn around our fortunes now and for the future.

Our current crisis is a product of chronic economic mismanagement. Successive governments from both parties have failed to create policies that strengthen the economy’s foundations, consistently grow GDP, and set up the economy for long-term success. Instead of addressing the root causes of stagnant growth, they have instead created policy sticking plasters that tide us over for another year or two, or quickly boost the economy in the run-up to a tight election.

It’s not always been like this. Between 1950 and 2008, our economy grew by an average of 2.6% per year, close to the global average of 3%, a respectable rate given the financial crises that occurred during that period. Compare that to the period after 2008 – since then, our growth has averaged out to only 1% per year while the global average has continued at the same rates as before.

This is not surprising when our share of global trade has continued to plummet. In the final quarter of 2022, the Office for National Statistics found that export volumes (excluding precious metals) were trailing more than 9% below our pre-pandemic average. This ranked as the weakest export performance among the G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the United States) and paled in comparison to Italian and Japanese exports which saw double-digit increases.

The impacts have been huge. As revealed in a recent TUC analysis, 2022 was the worst year for real wage growth since 1977, almost half a century ago. Wages in real terms dropped by 3% just throughout the twelve months of 2022, marking the sharpest fall since 1977 and the second worst since 1945, amounting to an average loss of income of £76 a month.

The government has been desperately scrambling to get the economy back on track. Their core principle, and the mandate that the Bank of England has been following, is to force down inflation. The official goal of 2% looks increasingly unrealistic, and while ever-changing Conservative governments try different tactics to achieve it, I’m left concerned by the Government’s inability to boost growth and inability to recognise that these tactics are failing.

A target of 2% inflation was supposed to produce stable conditions, steady investment, and growth. It hasn’t. Our investment levels are desperately low – only 17% compared to the global average of 25% and drastically below the 40% that China achieves. This is worrying when we know that investment is a key factor in generating higher productivity, enhancing technology, and boosting growth.

Low inflation will not be the silver bullet that the government believes it is. We urgently need an economic environment that makes manufacturing stronger, improves the competitiveness of the industry, and builds manufacturing policies into the very foundations of the economy. This can be harnessed to grow GDP at a rate that puts us ahead of countries around us – a minimum of 2.5 to 3% per annum should be our aim.

As it stands, the UK’s economic environment makes investing in manufacturing an uphill battle. Part of the problem is that the most lucrative forms of investment rely on internationally trading goods – and the strength of the pound means that, once exchange rates are taken into account, British goods simply cannot compete with products from other areas of the globe.

Since the late 70s, the service sectors have been prioritised in our economy. The UK is in a good position for services thanks to its geography, languages, legal system, education system, and access to skilled labour. It’s also less sensitive to exchange rates, operating perfectly well when the pound is at its strongest. This, however, is catastrophic for the manufacturing sector.

The result has been an increasingly weak manufacturing sector that has pushed companies out of the UK to more competitive countries abroad. As late as 1970, almost a third of the UK’s GDP came from manufacturing. Now, it’s less than 10% with no sign of picking back up, or even any real motivation from the government to stop it dying out completely.

So why should manufacturing be prioritised? To put it simply, manufacturing has a much more significant impact on increasing the UK’s productivity and has a better ability to boost our economic growth than other industries. Plus, manufactured goods are much easier to sell internationally compared to services as a proportion of GDP, helping improve the balance of payments that Britain has struggled with for decades.

I recognise that turning around the manufacturing sector to become the booming industry it once was is no small task. Even creating the appetite for these kinds of policies seems tricky at a time when politicians are more set on lowering inflation than ever. But, I believe that building manufacturing back up is absolutely possible and necessary for our future.

Making the exchange rate internationally competitive is non-negotiable. Without this, any goods exported from the UK will simply not beat exports from countries with lower exchange rates, as our goods will remain unaffordable in comparison. We need to create policies that maintain a sustainably low exchange rate that will keep us in competition, rather than treating it as an afterthought.

To prepare for a manufacturing boom, education needs to have a sharp focus on teaching the technical skills required for the industry. This includes teaching at a secondary school and college level, as well as providing options for already seasoned workers to retrain. I’d like to see the government implement national targets for students going into technical training and put more resources into careers advice for those wanting to start a career in manufacturing – all of which will be key to overcoming the already dire skills shortage.

There may need to be extra incentives for investment in manufacturing in the early years of this change in policy. Ideally, we would see the government collaborate closely with the industry by covering 100% of costs through manufacturing investment allowances, or take a role as the guarantor of investments and loans for the industry. Not only will this give manufacturing the kick-start it needs, but it will ensure that the government has skin in the game and is held accountable for its commitment to the policy.

We also need to think about how we reduce running costs for manufacturing firms. Energy prices are still unacceptably high, and the government has to find a way of making energy affordable while keeping carbon emissions as low as possible. Introducing something like a Green Investment Allowance which encourages green capital investment in energy-saving technologies would be a great first step. Reducing costs and delays in building factories needs to be considered too, perhaps starting by reviewing the Community Infrastructure Levy and Section 10.

Ultimately, the state of manufacturing in 2023 is a cause for concern. But, manufacturing is the government’s best chance at growing GDP and making the economy stable again.

Going for growth instead of inflation could be the catalyst for a manufacturing revival in the UK. With the proper investment and a genuine commitment to making manufacturing stronger on the international stage, we could turn around the 15 years of pitiful growth and dropping living standards that we’ve seen.

Raising GDP by 2.5% every year could see an improvement of over 25% in living standards in the coming decade and put the cost-of-living crisis behind us. There would be more funds available for public services and the NHS, and true ‘levelling up’ through bringing work and funding to forgotten manufacturing communities outside of the South East could rebalance decades-long inequalities.

Manufacturing must lay at the heart of the government’s economic agenda, and the joint focus of the government and the Bank of England on lowering inflation must come to an end. Growing the economy through industry is the best way forward.

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About the author

John Mills has just published his new pamphlet, ‘Rescuing our Economy’, which seeks to bring a much-needed intervention into the debate around inflation, stagnant growth, the valuation of the pound, and the importance of manufacturing to the UK economy. Mills is also the founder of John Mills Limited (JML), a consumer-goods distribution leader that sells more than 15 million products per year. He founded The John Mills Institute for Prosperity in 2020, a cross-party think tank committed to finding solutions to the West’s most urgent economic issues.