Sunday, January 17, 2016
When world trade struggles. so do Britain's manufacturers
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

containership16.jpg

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Another year is now in full swing. Alongside all the other things sent to try us, including weak and volatile stock markets, a plunging oil price and worries about global growth, manufacturing is in the doldrums.

Official figures last week confirmed the gloomy message of industry surveys. Manufacturing output fell by 0.4% in November and was down by 1.2% on a year earlier. Whatever things happened last year, a rise in factory output was not amongst them. And there is, sadly, nothing very new in this.

In the past four years there have been up years like 2014, when manufacturing output rose by a healthy 2.7%, and there have been down years like 2012 and 2013, when it fell by 1.4% and 1.1% respectively.

Broadly speaking, however, and allowing for the fact that there have been winners and losers within the overall numbers, Britain’s manufacturers are now producing what they were in 2011.

That was the year, of course, when George Osborne, in his March budget, talked about “A Britain carried aloft by the march of the makers”, for which he has been much lampooned, the latest in a series of politicians to see a bright future in manufacturing, only to see a grimmer reality kick in.

To be fair to Osborne, he thought in March 2011 that he was simply riding the tide. With parts of the service sector, most notably financial services, reducing activity, there did appear to be a genuine shift back to making things. Manufacturing output rose by a very healthy 4.5% in 2010 and Britain’s factories looked to be set fair.

That, unfortunately, was that. If every part of manufacturing had done as well as transport equipment (including cars), output up 38% since 2010, the chancellor would be hailed as a great sage. Well, he might. But other parts of manufacturing have either not prospered or fallen back sharply, for example in the case of sectors such as basic pharmaceuticals and textiles. Overall, the makers have not marched.

Why is this? Every time we get a disappointing set of manufacturing numbers, industry experts come up with a range of explanations, from skill shortages and high energy costs, through to lack of investment and Britain’s anti-industrial culture. All have a part to play in the long-run story of British manufacturing.

The manufacturing disappointment of recent years has a simpler and more straightforward explanation, however. When world trade does well, British manufacturing does well too. When world trade struggles, so will Britain’s factories.

In 2010, on the back of which Osborne chose to highlight industry, world trade boomed. Having dropped by more than 10% in 2009, the annus horribilis for the global economy, world trade volumes bounced back even more strongly in 2010. For a while it seemed as if normal service was being resumed for the global economy after the crisis, with Britain’s manufacturers playing their full part.

It was a false dawn. One of the missing ingredients of the post-crisis recovery has been world trade. 2011 saw a slowdown, 2012 and 2013 the equivalent of trade being becalmed in the Sargasso Sea. 2014 was better, hence a relatively good performance for manufacturers that year. That last 12 months have, though, seen trade growth fall back.

The CPB Netherland Bureau for economic policy analysis, which records world trade growth, says that it dropped back to just 1.4% in the autumn. As it put it: “Export momentum was down in both advanced and emerging economies.”

I have written before about the post-crisis weakness of world trade, suggesting a combination of lack of availability of export credit, some re-arranging of global supply chains and subtle protectionism.

Trade weakness is plainly not just affecting British manufacturers. The CPB Bureau also produces data for global industrial production, which shows a remarkably similar pattern to that of Britain. In Europe, Germany stands out as the only major economy which has increased its manufacturing output in this period of weak, post-crisis trade growth, with a rise of around 8% since mid-2010.

France, like Britain, is becalmed, while Spain and Italy are down. It is a tough world for manufacturers, and particularly tough in Europe. Maybe, also, something more profound is happening.

I don’t get invited to the Davos World Economic Forum these days but I notice that its theme for this week’s gathering in the mountains is the “fourth industrial revolution”, what it describes as the “ongoing transformation of our society and economy” by various technologies, ranging from robotics to artificial intelligence.

It is easy to mock Davos and its pretensions. Its themes have sometimes been spectacularly mistimed. But technology does change the nature of trade. This may seem an odd point to make when car sales in Britain have just had a record year of more than 2.6m new vehicles registered. We still eat and drink.

But the rise of a new kind of consumer intangible, the most obvious example of which is electronic downloads, is having an effect on trade. It means that, in the case of Britain, exports of services are fast closing on those of goods. As recently as 2010, service-sector exports were less than 70% of the value of exports of goods. In November last year, the figure was just under 90%. Soon Britain will be exporting more services than goods.

Even that may not fully capture the effect of intangibles but the net result will be that there will be a smaller increase in the output of manufacturers, and probably measured trade, for a given increase in gross domestic product and consumer spending in Britain and other advanced economies.

Does that mean we will never see a “march of the makers”? One would hope, despite some of the structural shifts that we are seeing in world trade, that it is not permanently in the doldrums. Some exporters will take comfort from the fact that sterling has come down from last year’s highs, particularly against the euro. At the margin, that will provide a boost for manufacturers.

But it would be unwise to expect too much. Some of Britain’s manufacturers are indeed marching, and long may they do so. Some, equally, are only going backwards.