The clear outcome of the 2015 election is without doubt good news for UK manufacturing, claims Nick Brainsby, director and partner of Pemberton Capital.
Over the past five years, the Coalition Government has presided over a partial recovery of UK manufacturing from the depths of the recession. The Conservative win in the 2015 election will at least ensure that UK manufacturers will have a benign political environment in which to operate over the next five years.
But there is much that this new Government can (and must) do to support the growth of UK manufacturing. Before considering what the new Government can do, it’s useful to look briefly at how UK manufacturing has fared since 2010.
It goes without saying that along with the rest of the UK economy, the manufacturing sector suffered a major contraction. During the worst of the “great recession” in 2008-2010 the UK lost more than 100,000 manufacturing jobs.
Although the UK economy has grown at an impressive rate since 2010, manufacturing – as a share of the economy – is still smaller than at the pre-crisis peak; while at the same time, the proportion of services as a share of the economy has grown. So much (so far), for “rebalancing” the economy.
And yet, the Coalition did make some genuine progress in supporting manufacturing. The maintenance of relatively low corporate tax rates and a fairly flexible labour market – which has benefitted from job friendly employment law and an open EU labour market – has done much to assist UK manufacturers’ competitiveness.
In addition, under the Vince Cable-led Department of Business, agencies such as the Manufacturing Advisory Service (MAS) and UK Trade & Investment (UKTI) were given a clear mandate to assist small and medium-sized manufacturers (SMEs) with operational and financial advice and access to export opportunities.
And of course the Coalition’s very tangible support of the UK automotive industry has been a notable success, with the benefits spreading across the UK supply chain.
It’s far too early to tell whether the new Business Secretary, Sajid Javid, will continue along the same route, but the initial indications are that he’s likely to take further action to make the labour market more efficient and to reduce levels of regulation for SMEs.
In the meantime, there are signs that the manufacturing recovery is weakening. Recent data from the CBI shows that manufacturing output growth has slowed to its lowest level since January 2013.
Although, again, it’s too early to tell if this is the start of a period of slower growth, there remains an issue which must be addressed by the new Government if manufacturing in the UK is to prosper.
The issue of productivity growth
There is no doubt that the growth in employment over the past two years has been impressive, but over the same period productivity levels have declined. According to The Economist, UK output per hour worked is 2% below its pre-crisis peak.
Effectively, UK manufacturers have been increasing their reliance on cheap, but not hugely efficient labour to boost growth and profitability. This has worked until now, but long term competitiveness depends on becoming more productive.
The uncertain economic environment over the past few years, combined with a lack of access to credit, particularly for SMEs, has meant that manufacturers have preferred to hire (often low-skilled) factory workers rather than invest in new equipment and technology. This has been tolerable up to now, but it’s not a way to build a competitive manufacturing sector.
So given this issue, what can the new Government do to better support the growth of UK manufacturing? As with any serious economic issue, there are no quick fixes and no guaranteed solutions, but three areas stand out.
First, the lack of credit for SME manufacturers must be addressed. Companies, particularly SME’s cannot remain competitive and grow if they cannot borrow to invest. Accordingly, without resorting to interventions which could distort the market, the Government should encourage lenders to give manufacturers greater access to funding for capital expenditure.
Second, rather than allocating vast resources to flagship infrastructure projects, the Government should direct infrastructure funding towards less glamorous projects which create better and faster local and national road and rail transport routes for materials and finished goods.
Thirdly, we need more focus on enhancing skills applicable to manufacturing. The Government’s aim of increasing the numbers of apprenticeships is welcome, but in the longer term, we must encourage greater co-operation on research and development between manufacturers of all sizes and universities.
This means, among other things, maintaining the current R&D tax credit system, but also providing greater funding to university led research and development in co-operation with innovative manufacturers. This would not only promote new developments but encourage capable graduates into taking up careers in manufacturing.
These ideas don’t require the Government to “pick winners” – that is what the market does perfectly well, but they do require long term focus and firm, rational policy guidance. I am not holding my breath, but we may now have a Government that is capable of delivering this.