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
90
92
94
96
98
100
102
104
106
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
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Un
em
plo
ym
en
t R
ate
Number of quarters
1980-81 recession 1990-91 recession 2008-09 recession
Redundancies and Company Liquidations 2006-2010
0
1
2
3
4
5
6
50
100
150
200
250
300
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
s
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
0
2
4
6
8
10
12
14
16
18
1971 Q1
1973 Q1
1975 Q1
1977 Q1
1979 Q1
1981 Q1
1983 Q1
1985 Q1
1987 Q1
1989 Q1
1991 Q1
1993 Q1
1995 Q1
1997 Q1
1999 Q1
2001 Q1
2003 Q1
2005 Q1
2007 Q1
Regio
nal C
laim
ant
Count
Rate
(%
)
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