The economy is recovering but it’s not yet rebalancing

Guest blogger

Progress has been made but the government is in danger of undermining its own industrial strategy, says the CEO of manufacturers’ organisation EEF, Terry Scuoler.

At long last we have some positive economic news and the long, slow haul to recovery looks underway. But what are the prospects for manufacturing and are we any closer to the rebalancing of our economy towards net trade and investment that we urgently need?

Manufacturing is currently growing quite strongly, with EEF’s latest forecasts showing that output will increase faster than the overall economy next year, mainly on the back of exports to emerging markets which have leapt by 50 per cent since 2009 and now outpace those to the EU.

But, beneath the headline numbers, there exists a divergence of sector performance, with some areas, notably aerospace and automotive set to lead the race, and electronics and rubber and plastics coming up on the rails.

However, other sectors such as minerals and pharmaceuticals are struggling, the latter as public health budgets come under increasing pressure. What does this manufacturing outlook mean for policymakers and what, if anything can be done, to boost growth and deliver the rebalancing we need?

Last September, EEF published its report ‘The Route to Growth – An Industrial Strategy for a Better Balanced Economy’. This called on the government to develop an industrial strategy that would produce a stronger and better, balanced economy. A year later we have published our assessment of the progress that has been made.

The economic news has certainly been better recently and, since last year’s Autumn Statement, the government has stepped up the pace on actions to support increased investment, more exports and stronger economic growth. So is it a case of job done – or job at least halfway done – and getting on with implementing it?

A closer look at the growth figures and EEF’s Four Growth Ambitions suggests there is still a long way to go to create the more balanced, sustained growth that will deliver improvements in living standards. And, although the government has done a lot more to encourage investment in new equipment, skills and new products and services, it has still not done enough to spell out its economic priorities and ensure that every part of its machinery is getting behind delivering them.

There are four reasons why this is critical. Firstly, though our economy looks slightly stronger, it still faces significant risks. These range from the deep-rooted problems with which many Eurozone economies are grappling, the growing headwinds buffeting some emerging economies and, closer to home, the danger that any improvement in credit conditions won’t be sufficient to ensure that stronger investment intentions get over the line.

Secondly, for too long we have relied on consumer and public spending to drive growth. Turning this around is not easy. In the last three years, business investment has contribution an annual average of just 0.06 percentage points. And despite a favourable exchange rate, three of our closest, similar-sized competitors – France, Italy and Spain – have all seen trade make a stronger contribution to growth.

Thirdly, on all four of EEF’s Growth Ambitions, we can point to government action to help achieve them. But our assessment suggests that we are currently only on track to meet the first of these: for more companies to bring new products and services to market. This kind of innovation is the only area where we have seen a consistent focus from government, cross-party agreement on what needs to be done and the stability of policy that gives it a chance to work.

In all the other areas – globally focused companies expanding in the UK, a lower cost of doing business and a skilled and flexible labour force – positive action on one front has been undermined by other measures that have either pulled in the other direction or have failed to support it sufficiently.

Finally, rebalancing is difficult, elections are getting closer and politics will inevitably become more complex. But rebalancing is essential to laying the foundations for lasting economic growth, higher productivity and rising living standards. And it is not a job that will get done in one year or one parliament.

It is vital to maintain the focus that will give convince business that all the main parties are in it for the longer-term. In the coming months, a commitment to these Growth Ambitions is vital to deliver the clarity and consistency of focus we need to build a stronger, more balanced economy.