Manufacturing, the Economy

and the West Midlands

David Bailey

• Manufacturing

• Broader Economy

• West Midlands

• Shift from RDAs to LEPs, Enterprise Zones...

1. Manufacturing

• Manufacturing output contracted by 15% during

the recession.

• Two years ago, in late 2009, our survey work with

Deloitte highlighted 3 key issues: Growth in export

markets, skills and credit availability

• These could help the UK rebalance its economy

and export its way out of recession: BUT also a

need for a more supportive economic policy

framework

• What actually happened over 2008 – 2011 ?

Output falls in the last 3 recessions

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108

0 2 4 6 8 10 12 14 16 18

GDP Index

Number of quarters

1980-81 recession 1990-91 recession 2008-09 recession

Unemployment rises in the last 3 recessions

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Un

em

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Number of quarters

1980-81 recession 1990-91 recession 2008-09 recession

Redundancies and Company Liquidations 2006-2010

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50

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2006 2007 2008 2009 2010

Thou

sand

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Redundancies Company Liquidations

What Happened?

• Positive steps taken by last government,

businesses and employees working together

to minimise impacts.

• Labour market flexibility: ‘labour hoarding’.

• Productivity: fall of 2.4% over 2008 and 2009;

also influenced by a bigger fall in business

investment than earlier recessions – linked to

credit crunch?

• Credit crunch explains depth of the recession,

and slow pace of recovery in productivity

following the end of the recessionary period.

Firms’ Responses to Recession

• Revenue generation; cost reduction; or asset reduction.

• Cost control – but different to past recessions:

• Labour hoarding, pay freezes, limits on overtime, short-time working, recruitment freezes, banking of hours, pay cuts, reduced shift-patterns, more flexible working, and use of fixed-term, temporary and agency staff, tele/remote working where possible.

• SMEs: revenue generating activities.

Why were firms more resilient in this recession?

• A supportive macro-economic environment,

including depreciation of sterling.

• The relative health of UK firms prior to the

downturn.

• The inherent flexibility of the UK labour

market.

• The collective approach to addressing the

impacts of recession taken by government,

businesses, unions and employees.

Manufacturing last year - 2010

• Manufacturing delivered: exported its way out of trouble, and helped rebalanced the economy.

• Manufacturing growth in 2010: 3.7%. Some regions: two-speed recovery (wider UK economy: 1.6%) ‘march of the makers’

• But: from a very low base. Restocking – not going to last forever.

• Sterling depreciation; export growth but not as much as hoped for. Why?

Manufacturing in 2010-11

• A more competitive manufacturing sector

expanded output and took on new workers at an

earlier stage of the recovery.

• Rapid bounce back until early 2011: around a

half of the manufacturing output fall had been

recovered.

• Confidence? PMI held up above 50 until early

2011.

2011 and Beyond?

• Manufacturing growth: run out of steam? Big fall in PMI.

• UK: consumer confidence, squeeze in real incomes.

• Externally: growth in the US and the World economy?

• Volatility in the Eurozone. Can exports be sustained? Need for an export push to new emerging markets further afield.

• AND will sterling remain low? Or appreciate against the euro as further weaknesses / faultlines in the Eurozone play out?

• AND: How will the fiscal cuts impact on the economy? Monetary policy?

• Cuts in support for business – RDAs. LEPs? Enterprise Zones?

Spare Capacity?

• Spare capacity so manufacturers able to increase output rather than prices, but for how long?

• How much capacity was lost or will be lost for good? If capacity loss significant then capacity limit will be hit sooner rather than later.

• At that point prices go up unless there is longer-term investment in capacity and productivity growth: getting the banks to lend to firms is key.

• Risk that prolonged weak demand will make temporary losses in output structural and permanent.

• GROWTH and INVESTMENT is critical (BCRS Report)

Need for future flexibility...

• Mucking-in’ by all stakeholders.

• Consumer goods manufacturers: high-value end of the market – prestige autos

• UK Manufacturing plc also does well in certain manufacturing sectors that are anyway more cyclical.

• Cycles at the luxury-end of manufacturing are generally more pronounced - high ‘income elasticity of demand’

• Need to do more to support such highly cyclical industries during the ‘downs’: put a floor under capacity + retain the skills base.

• Contrast with Germany for example.

If we really want to ‘rebalance’ the economy...

Industrial Policy targeted at manufacturing

• Capital allowances

• Focus corporation tax cuts for manufacturing

firms that increase output

• National insurance holidays for firms that take

on workers

• Better R&D tax credits

• Better support for exporters

• Automotive / manufacturing loan fund?

• Green Investment Bank?

2. Broader Economic Issues

• Level of demand in the UK economy: impact of

fiscal tightening.

• ‘Balance Sheet recession’ (Japanese

experience) + ‘Paradox of Thrift’ + ‘Prisoners’

dilemma’?

• Money Supply – M4 falling – need for more ‘QE’?

Don’t rule it out in late 2011/2012... (‘PLAN A+’?)

plus ‘credit easing’

Broader Economic Issues cont’d

• Bank lending and investment

• The level of sterling.

• Supporting exporters in new markets.

• Training and education for an increasingly high-skill and

high-tech industry needs.

• Industrial Policy? Despite the language of localism,

being re-centralised.

Bank Lending to Business

Summary

• Macro position possibly worse than looks

• Manufacturing slowing down, Retail, Services

• Headwinds from international economy

• Consumers squeezed

• Makes it difficult for growth ‘plan’ to stack up –

deficit reduction?

• Autumn Statement: ‘Plan A+’ enough?

3. West Midlands’ outlook

• Output drop and unemployment rise in West Mids worse

than other regions during early part of the recession

(not a surprise)

• BUT bounce back more rapid – rebalancing effect

(manufacturing, exports)

• Rapid jobs growth – out performing other regions.

• Reasonably placed (Deloitte, 2011): public sector job

cuts; tax rises and benefit cuts; revival in

manufacturing; weakness in fin services; house price

falls.

• PMI: 55.4 last 12 months; 53.3 last 3 months; 50.9

Recent regional economic trends

Source: Forrest Research

West Midlands: but a longer Term Poor track record

• long-term underinvestment in infrastructure

• an ongoing process of deindustrialisation and a wider economic

structure reliant on low growth sectors

• a relatively poor business and employment performance in the

private sector

• a relatively poor education and skills record

• relatively poor performance in developing ‘knowledge economy’

sectors and in R&D spend

• pockets of high levels of unemployment and worklessness

23

Contrasts in performance of region in recession; since

late1990s relative deterioration in West Midlands

Source: ONS, Regional Claimant Count Rates

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1971 Q1

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Regio

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UK

West Midlands

East Midlands

North East

South East

Upgrading the ‘middle’?

Some recent shifts:

• ‘Personalised manufacturing’... Car industry?

• ‘Functional’ to ‘hybrid’ goods: hybridity. Creative/design and

service element

• Brands, market repositioning

• Links ‘creative’ non ‘creative’ sectors – ‘platforms’ – see report by

Lisa De Propris and other for NESTA on mapping creative

industries

• Diversity / ‘serendipitous spillovers’ / related variety

• Clusters and a regional approach

4. (How) can LEPs be effective RDAs?

‘Old’ system of RDAs not perfect BUT...

Proposals do not make clear what regional growth

drivers / levers LEPs will be able to influence

What’s the Offer? Localism bill, RGF, Enterprise

Zones, faster planning...

Recentralisation / Decentralisation

Current proposals imply a substantial recentralisation to Whitehall

Centralised industrial policy not likely to work

LEPs: transport, housing, planning, enterprise (?)

Skills? Business engagement?

RGF big cut in funding – need scope for LEPs to raise own finance (TIFs / Business Rates?)

RDAs assets back to Whitehall / HCA.

Cont’d...

Risk of excessive fragmentation – functional economic geography? B’ham / Black Country?

Capability/capacity to make strategically informed decisions on economic development?

Need to retain key knowledge base built up by RDAs – RDA ‘Brain Drain’

• Need for ‘intermediate level’: Intelligence,

monitoring, accessing EU funding, regional

planning, clusters and innovation

Enterprise Zones - Past

• 1980s experience : £300 million spent on 11 zones.

4300 firms employed 63,000 workers BUT number

of new jobs created was just 13,000.

• £23,000 a job £50,000 in today’s money. Not

very good value for money!

• Boundary hopping

• Retail and property development – rebalancing?

• Risk: short-lived and ineffective?

Enterprise Zones – Future?

• Ideally - bigger

• Get key actors to work together to govern economic

development effectively

• Encourage ‘related variety’ ?

• investment in skills, infrastructure and the

environment to make them good places to do

business when the short-term tax relief runs out.

• Encourage small firms to grow – one stop shop?

• BUT risk: short-lived and ineffective?

Summary

• LEPs need genuine powers and ability to raise

funding

• Recentralisation of policy is a negative step

• RGF ?

• Intermediate ‘join up’ of work of LEPs between local

and national level critical to use public monies

effectively – minimum: intelligence and info

gathering base, pursuing effective cluster and

innovation strategies and accessing EU funding

Summary – cont’d

• Building partnerships and strategic

leadership skills in LEPs vital

• Enterprise Zones: lessons from Past

Thanks for listening.

Comments, Questions welcome!

david.bailey@coventry.ac.uk