Manufacturing at the heart of the UKs wellbeing

Published:  08 July, 2011

“Manufacturing is at the heart of the UK’s economic wellbeing”, commented John Cridland, CBI Director-General, at the recent British Fluid Power Association (BFPA) AGM in Birmingham. He added, “heads now nod far more vigorously than before the financial crisis”.

His speech was an opportunity for him to comment on the state of British manufacturing and engineering to key decision makers at the BFPA AGM.

He commented that the Chancellor George Osborne spoke in his last Budget speech of ‘the march of the makers’, but said we have to ask whether the reality matches it.

The question that many in the conference room were waiting to hear was how was the economy doing? He said: “The fundamental question of whether its recovery remains on track wasn’t really answered by the headline data for GDP growth in the first quarter. For once, the economic forecasters got it spot on in predicting a 0.5 per cent rise.

“This was enough to make up for the snow-affected surprise decline of the fourth quarter, but in itself wasn’t strong enough to assuage all doubts that there may still be trouble ahead.

“But I’d suggest to the doubters that the pattern of growth contained within that headline 0.5% increase provides a little more encouragement.”

He continued: “Manufacturing output grew by 0.2% in March, not much below consensus expectations of 0.3%. And while year-on-year growth has declined in recent months, this is partly because we’re no longer comparing against the trough of the recession. Rolling three-month-on-three-month growth remained stable and elevated at 1.1%, broadly in line with recent results from the CBI’s own Industrial Trends Survey.

“Beyond the slightly dry statistics, the underlying patterns of growth show signs that a rebalancing of the economy is underway. Those activities focused on the consumer remain very sluggish, while those that are exporting, or selling to the business sector, are doing better.

“To put this into some perspective, compared with 12 months ago, the economy has grown by 1.8 %, with manufacturing up 4.8%, the service sector up 1.4%, and the construction sector, which has been so volatile, up 3.5%. Were it not for the longer-term structural decline in oil and gas production, the economy would have grown by 2%. So the recent past is not quite as bad as some have portrayed it.”

Cridland then asked where does the economy go from here? He highlighted: “For more than two years the CBI has said the recovery would be difficult. The rapid bounce-back that often follows deep recessions – the so-called V-shaped recovery - was not going to happen this time for two main reasons.

“First, we’re in the aftermath of a financially-induced recession, and all the evidence shows that these are deeper, last longer and take more time to recover from. So the economic scars will take a long time to heal.

“Second, the UK - more than most of its competitors - needs to alter its growth model. For years we relied on one that was driven by a combination of public and debt-driven consumer spending, with the effects that became all too apparent. Now we need one based more on exports and investment. But although we’re seeing that shift in our pattern of activity from one model to another, this does take time, and in the interim, it imposes constraints on growth. So the net result of all this is that it’s not going to feel much like a recovery for a while yet.”

He explained that normally after a few years into an upswing we’d be enjoying GDP growth rates of three per cent or more. This time around, he said, this is highly unlikely. Latest expectations, according to the CBI, predict growth of 1.7 % in 2011, and 2.2 % in 2012.

Cridland made a few observations by stating that although these figures appear modest, the CBI surveys show that business confidence is improving, and confidence, he exclaimed, is the X-factor that triggers investment and growth.

Add to that the corporate sector’s substantial cash surplus, which means reduced reliance on constrained bank lending, and our forecast growth in business investment of close to nine per cent for both this year and 2012.

The CBI surveys tell us that companies are expecting to invest more in capital equipment over the next year, something that may be music to many ears after the pretty dramatic drops we saw during the downturn.

He also highlighted that orders, and particularly export orders, are expected to continue to expand.

So with domestic demand growth expected to be relatively restrained, net trade should support overall economic growth across this year and next.

He commented: “That’s not to suggest all is rosy with our trading partners: the Eurozone especially is looking a bit frayed at the edges.

“But overall this isn’t the moment to lose heart, or take too seriously the talk of a “flatlining” economy. Yes, the going is difficult. There are some big uncertainties ahead. It was always going to be a choppy, patchy recovery, and so it’s turning out to be. But the economy is on the mend.”

He went on to explain that much of the value in UK manufacturing has moved beyond its traditional base and is now focused on areas like process development, R&D, design and really high-tech engineering, rather than just production.

“And it’s performed. Since 1997, its productivity has increased by 50%, roughly double that achieved in the rest of the economy.

“But there are dangers. You may have seen the recent BBC interview with Nick Reilly, CEO of General Motors in Europe, in which he said, “our biggest issue is lack of suppliers in the UK”.

He warned that if Reilly is right, and if things like the UK’s auto components industry is teetering, then there’s the threat that more assembly activity will shift abroad, leading to supply chains being hollowed out still further. Cridland emphatically stated, “it’s essential they’re not”.

He also explained that Sterling’s depreciation in recent years has made sourcing here more attractive. And increased transport costs have made shipping components from abroad costlier: “Add to this the risks of long supply chains, and you can see why assemblers and first-tier suppliers might want to source more locally.”

In his speech, he also emphasised his three broad ambitions for manufacturing:

The first is to carry on increasing productivity, and aim for a five per cent a year improvement – better even than the four per cent a year we achieved in the decade leading up to the recession, and that was better than Japan, France, Germany or Italy.

Second is to enhance the UK’s deserved reputation for innovation in all stages in manufacturing, to lead the field in the development and implementation of key technological advances, but also to use new business models, services and other parts of the manufacturing supply chain.

And third is to double the growth rate of manufactured exports to at least match the OECD average by 2020.

He concluded: “Like with our whole UK as a place to invest project, these are ambitious aims. But they need to be, and I think they are achievable.”

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