Manufacturing and export analysis

Manufacturing and export analysis

The strength of manufacturing and growing exports are keeping the West Midlands ahead of the rest of the UK – despite a national slowdown in economic growth. Professor David Bailey reports.

The UK’s economic growth eased in the final quarter of 2014 to 0.5%, as global headwinds slowed manufacturing output and construction contracted, while services (especially retail) continued to grow strongly.

Overall growth for the year came in at 2.6%, down on the official forecast of 3% but still a respectable rate of growth, especially in the context of Eurozone recession and deflation.
But with the General Election looming, the news of an easing up in the pace of growth should come as uncomfortable news for Chancellor Osborne, although he can still claim that at 2.6%, growth was the “fastest of any major economy” and the strongest since 2007.

Moreover, the sharp fall in oil prices (down by over 50% since last summer) should simultaneously boost household budgets which have been squeezed for the last few years, cut manufacturing costs, and fuel growth in 2015. Not surprisingly, the E&Y Item Club have upped their forecast for 2015 UK growth to 2.9%. Growth in Q4 of 2014 was reliant on the UK’s dominant services sector, which accounts for as much as 80% of UK output, and which was up by 0.8%.

So much for rebalancing and the ‘March of the Makers’. Construction output shrank by 1.8% and manufacturing fell by 0.1% in Q4 of 2014. Rebalancing – at the national level at least – stalled in the latter part of the year. And it’s telling that only the UK’s dominant services sector is back to its pre-crisis strength.

There’s also a concern that the consumer-led recovery has again been built on more borrowing as incomes were squeezed up to the end of 2014, and that things could come a cropper if yet another housing bubble blows up. On that, it should be noted that prior to the financial crisis, the debt to income ratio in the UK was around 170%. The Office for Budget Responsibility (OBR) reckons it will reach over 180% by 2020, and currently stands at 146%. ‘Rebalancing’, so far at least, seems more like shifting the burden of debt from the public to the private sector.

What’s really been puzzling economists, though, is the UK’s ‘productivity paradox’.  What they really mean by this is that they don’t know why, since the 2008-9 financial crisis, the UK economy has apparently lost its ability to improve output from existing labour and assets.

Partly that was because when the downturn hit, firms – especially in manufacturing – hoarded skilled labour. Workers at JLR and other firms actually voted for real-term pay cuts to keep their jobs. As output dropped but employment remained relatively stable, so productivity fell. That was actually a good news story as it meant unemployment didn’t rise as much as had been feared. But that doesn’t explain why there hasn’t been a decent pick up in productivity since. What’s termed ‘multi-factor productivity’ (one way of looking at the efficiency of producing output from a mix of inputs) actually reduced economic growth by 0.5% last year. That might have something to do with access to finance for investment, for example.

Overall, what recent figures tell us is that while manufacturing had a ‘good’ 2014, it still has some way to go to recover the ground lost during and after the 2008-9 downturn.And a sustained manufacturing recovery is still not guaranteed, as the latest GDP figures show.

Doubts over the durability of the manufacturing recovery centre on fragility in key export markets, low levels of investment spending, concerns over the impact of high energy costs across the sector (on which the recent fall in oil prices should help), and issues of skills and access to finance further down the supply chain.

As I said a year ago here in BQ West Midlands, these factors could yet throw something of a spanner in the manufacturing works. Thankfully, the fall in oil prices, which will spur economic growth and cut manufacturing costs, has come at just the right time for the sector, and the wider economy.

On the positive side, last year saw another rise – albeit slight – in UK automotive output. This year should be even better, with full production runs of new Mini and Nissan Qashqai models, the new Jaguar XE coming on stream and the new Land Rover Discovery Sport hitting the roads.

JLR has just posted record output figures and should top 500,000 units this year, with big increases in sales beyond Europe being stacked up. Some 80% of cars made in the UK are exported, of course. But while JLR has led the automotive export charge into new markets beyond Europe, UK exports overall have failed to take off anywhere near as much as policy-makers had hoped for. The West Midlands is of course an exception to this, with export growth far beyond anything seen in any other UK region. The heavy lifting of rebalancing and exporting our way of trouble is only really happening here in this region.

Exports here now account for more than a fifth of the region’s GVA, and the region sells 12% of the goods shipped abroad from the UK. The rise in exports from the region has been driven by the automotive sector, which accounts for over 40% of the region’s exports.

Advanced manufacturing and engineering in the West Midlands can now compete with anywhere in Europe on the basis of high productivity, high quality and low labour costs. The region is also well placed to develop this further through investment in skills and technology. But to do the latter properly, ideally the region needs a better set of local policy levers so that it can do more to push things along and actively support our exporters, including greater attention to skills, access to long-term finance and support for innovation.

For example, in designing support for skills in the region’s ‘phoenix’ low carbon vehicle cluster or its serious gaming industry, local LEPs are far better placed to do this than a remote quango in London, which is far removed from where the action is really happening.

So far we have seen a strong effort by local actors – whether LEPs, suppliers, unions, assemblers or support agencies such as the Manufacturing Advisory Service – to work together to support the renaissance of local manufacturing. The co-operation between some of the local LEPs over inward investment and supply chain support, for example, has been genuinely first rate.

But that needs to be built on. Local authorities need to come together in a ‘Combined Authority’ to seize the devolution opportunity so that the region can develop a wider array of policies to boost the local availability of skills, foster the region’s innovation capacity, support the supply chain base, and provide effective support services.

And central government needs to listen and let go of such powers. Devolution isn’t necessarily going to boost economic growth in the UK overall as some regions won’t necessarily deliver. But this is the one region delivering the rebalancing and export growth so wanted by the government. Giving the region more power to push that along really does make economic sense.

Industrial learning

David Bailey is Professor of Industrial Strategy in the Economics and Strategy Group at Aston Business School (ABS), recognised worldwide as a leading centre of business education. From humble beginnings as a training centre for the industrial community to today, when graduates are sought out for their employability based on ABS’s placement model and work-based learning, the faculty are in demand for their understanding of what creates successful growth in companies. ABS provides an intensely practical and contextual business education with a strong commercial focus. It also concentrates on relevant research for business, and especially small and medium-sized firms, where it has a proven track record, with the aim of making business more effective.