The UK balance of payments could go into permanent deficit if there is no revival in manufacturing over the next few years, according to a new study.
Research for a wide-ranging report on the future for manufacturing by the Engineering Employers Federation and Warwick Manufacturing Group, to be published next month, forecasts a current account deficit of £35bn and a goods trade deficit of nearly £60bn by 2008 if manufacturing continues to grow by no more than it has over the last decade.
The EEF investigated three scenarios. In all three manufacturing is assumed to grow at 0.5% this year. After that, in the pessimistic model the growth rate is taken as 0.5%, roughly the same as the 1990s average. In the middle scenario the growth rate is 1.5% and in the most optimistic case it matches the economy’s long-term growth rate of 2.25%.
In this optimistic scenario, the trade deficit does not increase much from last year’s £28.8bn. In both the other scenarios a large and widening deficit on the goods trade account results, reaching £48.7bn in 2008 on the middle scenario and £59.7bn or 5.7% of GDP with the most pessmistic.
‘This isn’t unbelievable compared with the level at the end of the 1980s, but that was caused by a consumer boom and could be choked off by raising interest rates and taxes, whereas this would be permanent,’ said EEF chief economist Stephen Radley.He added that the last 10 years had been so bad for manufacturing that it was not over-optimistic to expect a growth rate of more than 0.5%. But to achieve a rate of 1.5-2.5% a number of issues such as a longstanding under-investment would have to be addressed.
The EEF dismisses the argument that there is no need to worry because services will take up the slack, pointing out that only a small proportion of services are traded. To make up any fall in manufacturing, services would have to grow by three times as much.
In addition, most service exports are ‘old economy’ while computing, information and communications services amount to only 5% of all services sold overseas.
Productivity gains are also harder to make in services than in manufacturing.
The model assumes only a small depreciation in the level of sterling, and that both exports and imports of services will grow at a rate close to the average for the last five years.