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,
and the sector provides about 3.8 million jobs directly (18% of
the total UK workforce),
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,
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,
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.
II MANUFACTURING OUTPUT
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
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. 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). The Government
should not be indifferent to whether the UK has large and persistent
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 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.
Other industries have faced knock-on effects from the difficulties
faced by the industries such as travel and tourism.
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.
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.
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. 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.
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.
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.
Similarly, the most recent CBI business attitudes survey reported
increased confidence within the manufacturing sector for sales
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.
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O'Mahoney, M. and de Boer, W, NIESR (1999) Back
Since renamed the Work Foundation. Back
HM Treasury: Pre-Budget Report 2001 Back
OECD Monthly Statistics of International Trade passim Back
Ev 104 -5 Back
Q 9 Back
Ev 104 Back
EEF Engineering Outlook, Jan 2002 Back
Data from the Office for National Statistics Monthly Production
Index, January to March 2002 Back
Q 175 (CBI) Back
EEF Engineering Outlook, Jan 2002 Back
Lifting the Barriers to Growth in Small Businesses, FSB,
May 2002 Back
CBI Economic and Business Outlook, May 2002 Back