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We still make enough stuff to trade our way out of recession

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    We still make enough stuff to trade our way out of recession

    http://www.telegraph.co.uk/finance/c...recession.html

    Happy days! We still make enough stuff to trade our way out of recession

    A large part of my bulging e-bag has recently consisted of protests that I am much too negative. Indeed, some correspondents even suggest that I am contributing to the national gloom by spreading depression across the breakfast tables of the land on Monday mornings. The great irony in all this is that if I have been wrong over the last two years it has been by not being gloomy enough.

    Nevertheless, even I concede that there will eventually be a recovery of some sort. And, because it is Easter, I have decided this week to write about an aspect of that recovery. But, please, don't conclude from this that I feel contrite, or that I have become more bullish or anything like that. On the contrary, I am as gloomy as ever. So there.

    I do, though, have a clear idea of what shape the eventual recovery must take. With consumer spending having to be subdued for some time as households try to repair their financial position and public spending growth set to fall to zero or go negative, there are only two possible sources of increased demand – the corporate sector and net exports. But with consumers and public sector demand weak there is no way that the corporate sector is going to push the boat out on its own. Strong growth of net exports may prompt more corporate investment but it won't happen the other way round.

    Whenever I say that this is what I expect, I am usually greeted with incredulity. How can we export our way out of this mess, people say, given that we don't make anything anymore? They then proceed to work themselves into a state of terminal gloom from which I, please take note, very cheerily, desist.

    It is true that manufacturing has declined sharply as a share of the British economy, from more than 30pc in the early 1970s to about 12pc now. However, while manufacturing's share of the economy has fallen, the level of output has still risen. Of course, manufacturing output has plummeted since the start of this recession, but over the 10 years to the end of 2007, it rose by 4.5pc in total. Indeed, for all the talk of decline, the UK is still the world's sixth biggest manufacturer.

    And 12pc is still 12pc. Manufacturing is still bigger than many other sectors of the economy. Indeed, it is some 1.5 times the size of the overall financial services sector, and around five times the size of the wholesale financial services predominantly found in the City. So much for the idea that without financial services we are finished.

    Moreover, what has happened to manufacturing in the UK is not unique. On the contrary, it is what has happened in all advanced economies. Even in Germany, since 1970 the share has fallen from 36pc to 24pc. And France has a manufacturing share only slightly larger than ours. In the UK's case, the share fell faster than in other countries, mainly because we have been operating with an uncompetitive exchange rate for more than a decade. That has now been rectified – with a vengeance.

    Of course, this does not mean that we will now reinvent the British textile industry, or become cost-competitive against China. But no British producer should now be saying that they cannot compete on costs with our trading partners in the euro-zone.

    There is some past form to go on. It took some time for UK goods exports to respond to sterling's exit from the ERM in 1992, primarily because of weak overseas demand. But eventually exports grew at double digit annual rates – even though manufacturing output was rising by more like 4pc. Indeed, by 1995 net trade was contributing about 1pc to annual GDP growth. And increasing the contribution of trade to aggregate demand isn't only about higher exports; lower imports will do just as well. In practice, while the world economy continues to be weak, it is on import substitution rather than higher exports that the immediate hopes for a boost must rest.

    Of course, the world trade picture has altered considerably since the 1990s. But UK manufacturers have not sat idly by as globalisation has transformed the world. Indeed, the UK is now one of the leading producers of chemicals, aircraft, electrical and optical equipment and green technologies.

    A lot of people think that manufacturing can't respond to the drop in the pound because we have lost the know-how and haven't got the capital equipment any more. So once manufacturing capacity is lost it is lost for good.

    But this doesn't really add up. On the whole, the UK has kept the high-tech production and primarily lost the relatively low-tech bits. So we've only stopped producing those things which don't require much know-how anyway. And we could presumably get some of the low-tech things back if it made economic sense. After all, it was predominantly countries with relatively low skill levels which took them off us in the first place.

    Often, indeed, it isn't whole areas of production that we are talking about but rather parts of a production process. Cars are a good example. Typically, cars produced in Europe include components sourced from several different countries. The sharp fall in sterling will tend to increase the usage of UK produced components, in both cars produced here and cars produced elsewhere in Europe.

    Moreover, most manufacturers currently have a large amount of spare capacity and so can raise output without needing more equipment. Cars being a good example again. And by the time they do need more equipment, they will have had time to invest. Although time lags can be long, more capital can surely be coming on line by the time the spare capacity has been exhausted.

    Net exports of services can rise as well. Admittedly, there is limited scope for growth in financial services, but other parts of the sector, such as business services, should be able to exploit the fall in the pound.

    Another sector to benefit will be tourism, which accounts for some 11pc of services exports. The number of visitors to the UK rose at double digit rates following the 1992 sterling depreciation. More Britons holidaying here rather than abroad counts as much as more foreigners coming here.

    So pessimism be damned – at least for one week. I can see how the UK can emerge from the current gloom. I just cannot see it happening any time soon.

    #2
    I only know one person that works in manufacturing now, he makes sinks and admits that his factory has the lowest efficiency of all of his companies factories in the world. I could count 2 up until last week but he got the bump from Motorola after 12 years and I fear there is nothing out there for him. Considering I studied engineering and live in what was once the greatest engineering city in the world it is a pretty shameful statistic.

    Best move I ever made was to move into IT but I can see the same things happening to IT as what happened to engineering in the 70s, offshoring, deskilling of the work force then an entire labour sector gone.

    Comment


      #3
      Originally posted by BrilloPad View Post
      http://www.telegraph.co.uk/finance/c...recession.html
      Blah Blah Blah

      So pessimism be damned – at least for one week. I can see how the UK can emerge from the current gloom. I just cannot see it happening any time soon.
      ... but do you have an opinion on the article or do you just see yourself as a facilitator?
      How fortunate for governments that the people they administer don't think

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