Small things can make a big difference. Had Thursday’s second-quarter gross domestic product (GDP) figures shown no growth at all, a fall, or even growth in line with the Bank of England’s 0.1 per cent forecast, the air would have been thick with talk of doom and disaster — and of it being time for the chancellor to go. Had it been 0.2 per cent, which most economists expected, it would have been so-so.
That GDP rose by 0.3 per cent in the quarter, and a strong 0.4 per cent in June alone — an unexpected bit of good news — does not show by any stretch that we or the chancellor are out of the woods. But it significantly eased the pressure.
True, it was down on the 0.7 per cent expansion in the first quarter, but that was always going to happen for familiar reasons, domestic and international. But it means that the UK did well in the first half of the year compared to America and other G7 economies. The second half may be another story, but that remains to be seen.
• UK growth beats expectations, boosted by higher government spending
We should not get carried away. GDP in the second quarter was only 1.2 per cent up on a year earlier, and by just 0.7 per cent on a per-capita basis. Growth this year is likely to be closer to 1.5 per cent than the latest official forecast of 1 per cent, but well short of the 2 to 3 per cent we need. One swallow does not make a summer. Business investment fell in the second quarter and productivity was down.
So, we still have a growth problem, and I received an unusually large number of responses to last Sunday’s piece on this issue. Very many made the same point, which is that we would be doing a lot better as an economy if we had a larger manufacturing sector.
What some call the wisdom of crowds is not always right, but on this, people have a point. The relative decline of manufacturing has been a feature of the UK economy for decades, but it was particularly sharp during the 1990s and 2000s.
I have discovered a fantastic resource run by the Economic Statistics Centre of Excellence (ESCoE) at King’s College London’s business school. On its website, you can gain access to UK national accounts going back to 1941, the very early days of GDP.
• UK manufacturers’ confidence rises to a nine-month high
I have not been back through the lot, but enough to tell you that in 1990 manufacturing had a weight of 23 per cent in the UK’s gross value added, a close relative of GDP. By 2000, that weight had dropped to 18 per cent, and by 2010 to just 10.4 per cent.
A lot of the fall was due to the pound being strong between the mid-1990s and 2008, reflecting confidence in the then Labour government and the newly independent Bank of England, but rendering much of UK manufacturing uncompetitive. Manufacturing’s share now, based on 2022 weights, is just 9 per cent. The World Bank’s figures, which I have used in my chart, are slightly different but show the same direction of travel.
Would we have done better with a larger manufacturing sector? As you will know, the economy has been plagued by weak productivity growth since the 2008-9 financial crisis. If we look at manufacturing productivity, though, it has grown by an enormous 154 per cent since 1997, when the current run of statistics starts, and by a smaller but very respectable 17 per cent since 2008, outstripping the rest of the economy.
In contrast, financial services and insurance, in which so much hope was placed during the 2000s, has generated cumulative productivity growth of just 34 per cent since 1997, and a fall of 14 per cent since 2008. It has become a drag on productivity, and thus on growth. Hot off the press are the latest figures, which show that manufacturing productivity is up by 7.4 per cent compared to pre-pandemic levels, while financial services productivity is down by 6 per cent.
Some would argue that this is because financial services were over-regulated after the financial crisis, though the chancellor’s attempts to roll back some of that regulation is getting some pushback from Andrew Bailey, the Bank of England governor.
The growth in manufacturing productivity has been achieved by those who have survived its relative decline. We cannot know for sure that this would have been replicated by a larger manufacturing sector, but for a long time, manufacturing has tended to achieve higher productivity growth than the services sector, not least because productivity improvements are both easier to implement and more measurable.
Manufacturing contributes three-quarters of the UK’s exports of goods, and its decline has been associated with huge increase in the UK’s visible trade deficit, up from £15.9 billion in 1997 to £222.4 billion last year. Adjusted for inflation, the goods deficit is about 18 times what it was. In 1997, the UK had a £23 billion trade surplus on “machinery and transport equipment”; last year, there was a £58 billion deficit.
This is not to say that financial services, the City — in which the UK has a comparative advantage — does not contribute significantly; it is a big generator of overseas earnings and tax revenues. It is just a pity that its rise appears to have been at the expense of manufacturing. Its weight in GDP is 8.8 per cent, and taken together with the larger business services sector (accountancy, law, management consultancy, advertising, public relations etc), that share rises to just over 35 per cent.
A bigger manufacturing industry is no guarantee of success. Look at struggling Germany, where the sector accounts for between 18 and 19 per cent of GDP. Currently, too, manufacturing is the main target for Donald Trump’s damaging tariffs, as well as being the sector most affected by high UK energy costs.
Manufacturing did well to record a 0.5 per cent rise in output in June and a 0.3 per cent increase in the second quarter. But parts of industry, notably car manufacturing, having lost the advantage of being inside the EU single market, are struggling. Output so far this year is down by 7.3 per cent, with a rolling 12-month total only 40 per cent of that achieved in 2016.
We cannot turn back the clock. It is hard to find examples of countries that have reversed a declining manufacturing share of GDP. The struggles of car manufacturers show the pressing need to hold on to what we have got. We would have done better if we had held on to more manufacturing in the past.
PS
A long time ago, I wrote a book called North and South, on Britain’s regional divide. That is not a plug; sadly, it has been out of print for many years, though there may still be one or two copies knocking around in charity shops.
Anyway, in the book all those years ago, I decided that the economic “South” of the UK consisted of six of the official regions: London, the South East, the East of England, the South West, the West Midlands and East Midlands. The rest of the UK’s regions and countries were the economic “North”. And yes, I was aware that South Wales is more southerly than some of those regions. But when the book was written, the division worked pretty well.
Anyway, having spent a few days in Derbyshire, part of the East Midlands, I have decided — how shall I put it? — that quite a lot of it is definitely northern, and not only because of the way people speak. Indeed, parts of Derbyshire are north of Sheffield, which is definitely in the North. The official regions of the UK are perhaps not subtle enough. The people of Stoke, in the West Midlands, would never see themselves as being part of the South.
It is not the only thing that has changed. The latest detailed regional GDP figures from the Office for National Statistics, published in the spring, are for 2023. They show that GDP per head in the East Midlands (£31,446) and West Midlands (£32,077) are both below Yorkshire and the Humber (£32,625) and the North West (£35,635). Even Northern Ireland, £32,944, did better. Scotland has always been an outlier, in a good way: its GDP per head in 2023 was £37,192.
Does this suggest that levelling up has been a reality, or merely that the poor old Midlands are doing badly? I suspect the latter. It is still the case that London (£69,077) is off the scale compared to the rest of the country, while the rest of the South East is on £41,319. The North East (£28,583) and Wales (£29,316) show that we still have a regional problem in this country.