Is UK manufacturing in decline?

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It is estimated that in the Mid-Victorian age the UK was producing 40% of world manufacturing output.

Clearly this is not the case anymore and even if the sector has declined over the years, it doesn’t mean that some sub-sectors are not world class.

A clear example can be the aerospace sector which is a sector at the technological frontier for which the UK is the second largest producer in the world after the US (you can read more about it on our aerospace sector bulletin). And this is not the only example!

Is it just the UK or have other countries followed a similar path?

No, it’s not just the UK!

Most of the countries in the high income category have moved towards an economy mostly based on services instead of one based on manufacturing.

Historically this was a similar shift as when people moved from the countryside to cities to move from the primary sector to industry.

declining_mfg 

Maybe the UK followed a steeper path in this transition with a very quick shift in the late 90’s up to the financial crisis.

This doesn’t mean that the manufacturing sector actually contracted, but just that the share of manufacturing on total economy declined during the years as the graph shows.

The only country which appears to be an outlier in this descendant path is Germany which was able to stabilize its position at around 23% of total economy.

Interestingly, a similar decline trend in manufacturing importance over total economy happened also to countries not part of the high income group. However, it should be noted that their share of manufacturing on the total economy is currently still well above the one of high income countries (around 20%, China 30% - World Bank, 2015).

 

Have all the jobs gone to China?

Well, some of them for sure. But not all!

China and Eastern Asia in general can be attractive for some activities, usually those where labour cost makes a real difference. These activities are linked to low-tech and low-value added productions.

Looking at the numbers, foreign direct investment in China (including Hong Kong) has been constantly growing in the recent period with a three-fold growth in the international investment position (IIP) in the period between 2007 and 2016. However, the absolute IIP value in 2016 accounted for only 6.0% of the world total, whereas the US and the EU accounted for 19.9% and 43.4% respectively.

When production is focused on skills and high-level technology, there is a comparative advantage in producing in the UK or, in general, in the Western world.

 

Did we shift our production?

Linked to the previous point, the production of low value added products has clearly suffered the competition of cheap labour countries. This created an incentive to shift and change the structure of manufacturing.

shift 

In the graph, we have chosen one sector (textiles) that, on average, does not require a high level of skills and another one (transport) where technology and skills are playing a crucial part. It is pretty clear how the two sectors have diverged in the last decades and it is highly likely that the trend will continue in the future.

 

Can the trend be reverted?

Well, it’s a possibility, but definitely not at a level close to the Victorian age one.

Moreover, it is unlikely to reach the 20/25% share like Germany currently has considering that the UK is mostly a country focused on services. Nevertheless, it is not impossible to revert the trend and move from 10% of total economy towards a little bit higher level.

However, the most important thing to keep in mind is that manufacturing should not be focused just on enlarging its size compared to the total economy, but it should actually be pushing towards a sustained growth in terms of value added, technology level, and productivity.

 

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