Could British industry make a comeback?

British industry has been shrinking for years. But with the City and consumers both ‘credit crunched’, can it now dig the country out of a hole? David Stevenson reports.

British industry has been shrinking for years. But with the City and consumers both credit crunched', can it now dig the country out of a hole? David Stevenson reports

Is Britain headed for recession?

It doesn't look good. Collapsing house prices look set to squash the UK's national finances. Income-squeezed consumers are having to slash their outgoings as mortgage payments rise, and they can also no longer rely on an endless stream of equity from their properties to fund their buying habits. With consumption accounting for two-thirds of our annual output, there is a growth gap that will take some filling.

The City is also starting to suffer a nasty hangover after years of hedonistic partying with other people's cash. With financial and business services' constituting some 30% of Britain's gross domestic product, any downturn in Square Mile fortunes will hit the economy as a whole.

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As banks continue to cut lending, corporate profits and personal incomes will be affected, and jobs and tax revenues will be lost, making life harder for individuals and Government alike. Chancellor Alistair Darling has already cut his 2008 economic growth forecast to 1.75%-2.25%, well below the 2.5%-3% predicted in last year's Budget. And although the official 2009 guess is a return to the long-term 2.25%-2.75% average, most analysts reckon that 2% is nearer the mark, with the risks on the downside.

Can Britain's manufacturers step up to the plate?

Some commentators, notably Roger Bootle of Capital Economics, suggest that a weaker pound will increase demand for our exports, aiding an economic recovery. And the idea of the UK earning its crust by actually making real things does sound appealing.

But although Britain may have a distinguished industrial past, does it have a future? After the early 1990s recession, swathes of industry were laid waste due to a mix of excessive costs and an uncompetitive exchange rate. The country now has a £70bn deficit in traded manufactured goods by far the highest post-war figure at around 7% of GDP. Trade in services such as accountancy, insurance, banking, architecture and advertising reduces the deficit to around 4% of GDP.

How deep do British industry's problems run?

Very. The UK has been progressively de-industrialising for over 40 years while putting more and more of its economic eggs in the financial-services basket. Since 1965, six million manufacturing jobs have been lost, says Rolls-Royce chief executive Sir John Rose. The sector has now shrunk to only 14% of UK GDP, down from 22% in 1995. Yet manufacturing still supports nearly a million jobs, 83% of overall exports and approximately 75% of all UK research.

So some things are still Made in Britain'?

Yes, but the sad truth is that apart from a world-class pharmaceutical industry and a reasonably robust arms business, Britain is no longer a top manufacturing dog. The FTSE 100 index starkly tells the tale. Just 10% of Britain's overall stockmarket value is in healthcare and engineering, a far cry from the days when the now Dutch-owned chemicals giant ICI was the market bellwether.

We're not like the Germans, who've maintained their export momentum through thick and thin. A recent Legal & General study found that Teutonic exports between 2003 and 2007 grew some 60%, despite flat American demand. Britain, by contrast, merely ran up massive traded goods deficit.

Haven't we seen manufacturing comeback hopes before?

When sterling was drummed out of the old Exchange Rate Mechanism in 1992, hopes were high that a cheaper pound would help British factories. But until this year the pound has stubbornly refused to ease enough to give Britain a competitive edge. From 1973 to 2000, the UK's trade with other EU members was £91bn in deficit, but £71bn in surplus with the rest of the world. Between 1991 and 1996, the increase in Britain's exports to countries outside the EU was 44% greater than to countries within.

Are there any rays of light here?

The idea of UK plc as a glorified hedge fund dwarfing a shrivelled manufacturing base may be overstating the case. Goldman Sachs doesn't believe the financial and business services' arena is oversized at 30% of GDP, as only 7%-8% is financial', providing 4% of overall employment, just 1% above Germany and France. During the last nine months, there's been a sea-change in the forex markets, with the pound diving against the euro by almost 20%, making life easier for British exporters.

Of course, with the US dollar also recently in freefall, the pound's value against the greenback has remained largely unchanged. And against a background of declining world growth, revitalising export markets won't be easy.

What could rebalance Britain's economy?

Sir John Rose believes it's time to start rebuilding Britain's industrial capabilities before the UK's world-class research is harmed. He has called for a diverse economy in which high value' manufacturing counterbalances a thriving high-value service sector. Rose cites France's World Competitive Cluster' in Toulouse as a great example of industry, academia and government working together to create world-class products, supporting 94,000 well-paid, highly-skilled jobs in 1,200 companies, making a turnover of e10bn. But Rose says the British Government needs to develop a much clearer sense of direction, as well as strongly branded, export-orientated policies for something similar to work in the UK.