Select Committee on Trade and Industry Third Report


1.   In the past, some commentators have taken the view that the maintenance of a strong manufacturing sector may not be important when placed within the context of the UK economy as a whole. We take a different view. Manufacturing output generates 19% of GDP in this country,[1] and the sector provides about 3.8 million jobs directly (18% of the total UK workforce),[2] and supports large numbers of service sector jobs. It accounts for 60% of UK exports. As a major potential contributor to innovation and technology development, it is vital to the establishment of a knowledge-based economy.

2.   The productivity and competitiveness of the UK manufacturing sector, however, has long been a source of concern to economists, politicians and industrialists alike. A number of recent reports have highlighted the productivity gap that exists between the UK and the US, Germany and France. Productivity has consistently lagged behind that of our international competitors for more than twenty years,[3] with few signs over that period that the gap can be closed, despite the concerns expressed by successive governments over the competitiveness of the manufacturing sector.

3.   To add to the problems of the industry, the events of 11 September 2001 had a significant impact on international trade which, amongst other things, could have served to exacerbate the problems of UK manufacturing sectors dependent on trade with the USA, such as the aerospace industry. We decided to investigate the reasons for the long-term productivity gap in UK manufacturing and to assess whether the events of 11 September have had a significant effect on the ability of the sector to compete on world markets.

4.   To that end we considered written evidence from 22 organisations and individual companies. We took oral evidence from the Society of British Aerospace Companies (SBAC), the Engineering Employers Federation (EEF), the British Chambers of Commerce (BCC), the Industrial Society,[4] the Confederation of British Industry (CBI), the Trades Union Congress (TUC), Amicus-AEEU, the Engineering and Machinery Alliance (EAMA) and the Secretary of State for Trade and Industry. We are grateful for all of the evidence we have received, both orally and in writing.


Long-term trends

5.   As can be seen in Figure 1, the proportion of national output provided by manufacturing has fallen steadily over the past thirty years in all of the major industrialised economies. In the UK manufacturing accounted for 35% of GDP in 1960; by 1999, this had fallen to 19%. Output in France, Germany, Italy, Japan and the USA all showed parallel decline.

Figure 1: Manufacturing as a percentage of GDP 1973-2000

Source: DTI memorandum, Figure 1.

6.   The Treasury attributes much of this decrease to changing patterns of domestic demand, for example the increased proportion of disposable income allocated to services and luxury goods.[5] In addition, globalisation of trade has intensified international competition in manufactured goods and much mass production has shifted to lower cost countries. Improvements in technology and manufacturing techniques have further contributed to the decline in prices for manufactured goods, which in turn reduces manufacturing's share of total GDP. The impact on the UK's trade performance of the decline in the manufacturing sector should also be considered. Other countries still satisfy a substantial share of their domestic demand from their own manufacturing industry (France and Germany, for example).[6] The Government should not be indifferent to whether the UK has large and persistent trade deficits.

Impact of 11 September

7.   GDP growth in all industrialised countries slowed during 2001, with the greatest effects felt in the USA. As a result global demand for manufactured goods has decreased throughout 2001. US output peaked in the summer of 2000, since when output in all major industrialised economies has declined. The global recession in manufacturing was well established before the events of 11 September.

8.   Several witnesses agreed with the TUC's assessment[7] that the impact of the events of 11 September reinforced and accelerated a fall in world trade that was already under way. Although the overall economic effects in the UK have in general been limited and short-lived, and consumer confidence in the UK has not been damaged, the manufacturing sector was exposed to the economic consequences of 11 September more than most through depressed demand in export markets. Industries such as aerospace have been placed under additional pressure as a direct result of reduced orders. The SBAC predicted that their members would experience a two year dip in aircraft production.[8] Other industries have faced knock-on effects from the difficulties faced by the industries such as travel and tourism.[9] High-technology sectors such as electrical and engineering were affected by a structural downturn in demand in their markets which, although exacerbated by 11 September, was well underway already.[10] There are suggestions that companies used the events of 11 September as a pretext for bringing forward job losses.

9.   We found agreement in many sectors that, although serious in the short term, the events of 11 September should not have great long-term significance for the productivity and competitiveness of UK manufacturing.

Short-term trends

10.   Although, since we began our inquiry, there have been signs that the global recession may be coming to an end, the short-term outlook for UK manufacturing remains difficult. Manufacturing output in the UK declined by 2.3% in the 12 months to December 2001. This downward trend continued in January, when manufacturing output fell by 0.4% compared with December. Although a month-on-month increase of 0.4% was recorded in February, March saw a resumption of the decline, with a fall of 0.8%. Over the first quarter of 2002, manufacturing output fell by 1.5% compared with the previous quarter.[11]

11.   The CBI had forecast that manufacturing output would fall by about 1.5% in 2002, and that the overall downward trend would bottom out after that.[12] The EEF told us that a recovery in the engineering sector was unlikely to begin before the end of this year and reported pessimism among its members, with a growing number expecting a further decline in output and sales in the current year.[13] However, the latest reports from both the CBI and the Federation of Small Businesses (FSB) indicate that confidence among businesses is growing once again. The FSB reported that over half of the firms included in its latest survey had forecast improved prospects for sales and production.[14] Similarly, the most recent CBI business attitudes survey reported increased confidence within the manufacturing sector for sales and output.[15]

12.   While manufacturing output seems likely to remain depressed in the short term, we note with interest reports of cautious optimism among manufacturers that markets and output will recover during this year. The evidence we received, however, did not suggest confidence that a sustained rise in output, which would suggest relative improvements in UK productivity, was in prospect.

1   Ev 179 Back

2   Treasury Pre-Budget Statement, October 2001 Back

3   O'Mahoney, M. and de Boer, W, NIESR (1999) Back

4   Since renamed the Work Foundation. Back

5   HM Treasury: Pre-Budget Report 2001 Back

6   OECD Monthly Statistics of International Trade passim Back

7   Ev 104 -5 Back

8   Q 9  Back

9   Ev 104 Back

10   EEF Engineering Outlook, Jan 2002 Back

11   Data from the Office for National Statistics Monthly Production Index, January to March 2002 Back

12   Q 175 (CBI) Back

13   EEF Engineering Outlook, Jan 2002 Back

14   Lifting the Barriers to Growth in Small Businesses, FSB, May 2002 Back

15   CBI Economic and Business Outlook, May 2002 Back

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Prepared 12 June 2002