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On de-industrialisation

Manufacturing is in decline, and not just because of Brexit. This matters
October 17, 2019

UK manufacturers are in a bad mood. Next week’s CBI survey is likely to show that business confidence is depressed and that order books, output expectations and investment intentions are all low. This will be widely blamed on the fear of a hard Brexit. However, while there is little doubt that Brexit is indeed damaging, it is by no means the only reason for manufacturers’ woes. There are others.

One is the weakness of world trade: official Dutch statisticians report that this fell in the last 12 months. This is partly because of the tariff war: the American government can match the British for asinine economic vandalism. But only partly. World trade growth slowed sharply even before President Trump was elected and for deep structural reasons: a fear of credit constraints; depressed animal spirits deterred investment in overseas sales networks; companies became increasingly aware of the difficulties of managing global supply chains; and so on.

A further problem is a lack of profitability. Official data show that the net return on capital in manufacturing is lower now than it was 20 years ago, And this might actually overstate manufacturers' health. The Office for National Statistics (ONS) measures the capital stock at replacement cost, which means that if capital goods prices fall its measure is lower than the historic cost of capital – which is what companies actually paid. This fact helps explain another one – that manufacturing investment, even before this year’s fall, was lower than it was 20 years ago.

Low investment helps explain another problem: low productivity. Output per worker in the sector is lower now than it was in 2011. That compares to growth of a healthy 3.4 per cent in the 30 years before the 2008 crisis. This contrast can’t be wholly blamed on weak demand growth – much of the good efficiency gains prior to 2008 occurred against a backdrop of weak output growth. Instead, it’s likely that the productivity stagnation is a symptom of a lack of innovation.

Of course, manufacturing has been in relative decline for decades – so much so that it now accounts for less than 10 per cent of GDP, the lowest proportion since the early 19th century. That decline, though, wasn’t so important when the service sector was expanding quickly. Now it is no longer doing so, manufacturing stagnation is part of general stagnation.

Our national obsession with Brexit is distracting us from such problems – the cynic in me suspects this is intentional.

But does manufacturing matter? I think so, for at least three reasons. One is that the sector contributes disproportionately to our exports and hence our ability to pay our way in the world. The decline of manufacturing has coincided with a long-term increase in the current account deficit, which means we are borrowing more and more from overseas. It’s not clear that this is sustainable.

Secondly, manufacturing was historically a source of decent employment for less qualified people. Although employment in the sector has stopped falling, it hasn’t done so sufficiently to recreate those lost jobs. This has contributed to the anti-elite political environment.

Thirdly, the decline of manufacturing has meant the declining cultural and political significance of a particular skillset – that of the engineering boss. If your machine doesn’t work, no amount of spin or obfuscation will change the fact. If, however, you are selling buggy software, rank beer, mispriced insurance (or bad journalism!), spin and obfuscation are vital. It might be no accident therefore that a post-industrial society is also a post-truth one.