Last month, UK automotive components manufacturer Brose
installed a new £10 million ($13M) paint line at its factory in Coventry,
England. Brose hired an additional 30 workers to staff the paint process, bringing
its UK workforce to nearly 1,000. Juergen Zahl, president of the UK branch of
German-headquartered Brose called the Coventry expansion a “massive show of
faith” in Britain’s position in the global auto industry.
“Brose is committed
to growing our UK operation.,” Zahl explained to a Coventry newspaper. “Coventry
was our first non-German site and, operationally, is now performing at a level
which secured us Cranfield University’s Best Factory Award in 2016.”
You wouldn’t know about this business expansion if you are a
New York Times reader. On Oct. 31st,
the Times ran a doom-and-gloom story
entitled “What’s the Economic Cost of
Brexit?” The reporter quoted economists and others bemoaning the alleged “uncertainty”
caused by Britain’s decision to pull out of the European Union by March 2019. Like
the witches in a Shakespeare play, British economists have been offended that
the electorate ignored their dire warnings and have sought to cast a spell over
the economy ever since the ides, sorry the 23rd, of June 2016. Yet despite
the constant drumbeat of gloomy forecasts, political disunity in Westminster, sudden
departures from Theresa May’s Cabinet, and the growing difficulty of
negotiating a post-Brexit trade agreement, the British economy, and in
particular its manufacturing sector, is actually doing better than ever.
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Read more of my writings for CPA here.
Read my 2016 post on British industrial strategy here.
Globalists would like people to believe that an economy
cannot succeed unless it enters into supranational organizations like the
European Union or World Trade Organization. But that’s just not true. Economic
growth depends on what it always has: making the right products better than the
competition and selling them well.
The biggest boon the British economy received after the June
2016 Brexit referendum was a sharp fall in the value of sterling. The pound is
now down some 10% from its pre-referendum level. (See Figure 1) The benefits of
a lower exchange rate are that it gives a boost to exports, it makes domestic
production more competitive against imports, and it encourages savings. A lower
exchange rate also gives a boost to inflation, which is often not a good thing
for an economy, and we’ll get to that in a moment.
Figure 1: Pound
Sterling Exchange Rate: Down 10% from
pre-Brexit levels. (Source: BIS via US
Federal Reserve Bank, St. Louis)
Up to now, the British economy has suffered from what could
be called the American Disease. Main features of this malady include:
- Deep and persistent trade deficits. Last year the UK’s current account deficit was 4.4% of its GDP, even worse than the 2.6% deficit recorded by the US. The US current account deficit has persisted for 41 years. The UK has racked up deficits for the last 31 years.
- Hollowing out of the manufacturing base.
- Weak investment in plant, equipment, and construction (as a share of GDP).
- Expansionary government economic policy, aimed at boosting domestic consumption, which results in an expanded trade deficit, and intensifying problems 1 through 3.
One way to break through this vicious cycle is to cut the
exchange rate and use the resulting competitive advantage to build up your
export industries. This is exactly what is happening in Britain today. Theresa
May’s divided Conservative government did not set out to achieve the lower
exchange rate. It was thrust upon them by the financial markets, which
perceived Brexit as a threat, partly because Brexit is indeed a threat to their
own livelihoods as members of London’s highly-paid financial services industry.
In September, UK manufacturing output growth came in at
double the level forecasted by economists. “Annual growth in export volumes was
still a punchy 10 percent in September,” UK government statistician Kate Davies
told the Financial Times on November 10th (sounding shockingly
exuberant for a statistician). “And surveys suggest this strength should
continue, while import growth should slow in line with weakening consumer
spending growth,” she added.
But the news gets better. On a year-on-year basis,
production of transport equipment (including automotive) was up 5.8%,
production of other machinery and equipment was up 9.2%, and production of
computer equipment was up 9.7%. These excellent growth rates point the way to
the trend that the UK government should promote in the years ahead. In the auto
industry, UK labor costs are highly competitive and the UK benefits from
millions of investment dollars from Toyota, Nissan, Jaguar Land Rover, and many
component and subsystem suppliers. In the computer industry, while Asia has
taken over the vast bulk of worldwide computer manufacture in the last two
decades, the tide may be turning. US technology buyers (including the US
government) are rethinking the issue of technology manufacture, in light of
recent revelations such as the danger that US military bases are guarded by
Internet-enabled security cameras manufactured by a Chinese company. A move to
favor products made by friendly nations may not be too far away.
The New York Times
got its knickers in a twist over the fact that consumer spending is sagging,
inflation is up to 3%, and the price of pineapples measured in pounds sterling has
risen (I kid you not). The Times was
reflecting the views of mainstream economists who believe that propping up
consumer spending is the key to economic success and the key to the current
government winning the next election. Economists have a habit of presenting
their world-view or analytical framework as the uniquely correct world-view and
then confusing non-economists by dispensing judgments without revealing their
thought process and the prejudices they conceal.
I shall be very clear about the different world-views so
readers can make their own judgments. Conventional UK economists generally
favor policies aimed at getting unemployment down and consumer spending up in the short term. This is reasonable as
the political cycle drives most government economic policymaking and if one is
an economic advisor to the current government, one should advise them to do
whatever maximizes their chances of reelection.
I am a growth economist and an industrial economist. In my
view, the need to maintain employment and consumer spending has large costs in
terms of medium-term and long-term growth. Since 1950, the UK has pursued
short-termist consumption-focused economic policies (with the sole exception of
1979-1990 when “Iron Lady” Maggie Thatcher pursued a different set of
policies). The result can be seen in Figure 2, where the UK has the lowest rate
of fixed investment of any major economy, at 16.5% in Q2 2017. Investment is
the main driver of future growth.
The map in Figure 3 (below) shows the results of 67 years of
short-termist economic policies. While London and its suburbs are as affluent
as anywhere in the EU, the Midlands, North of England, Scotland, and Wales are mired
in relative poverty, equivalent to southern Italy. Germany has not only
surpassed the UK in income per head, but has become the dominant power in the
EU (which may one day become the German Economic Union). Germany has delivered
these outstanding results by pursuing export-led growth-oriented economic
policies: investment in high-value industries (mainly manufacturing), promoting
export industries, restraining wage increases and consumer spending to free up
resources for investment in industry, and ensuring a competitive exchange rate
(indeed an excessively low rate under the current euro currency system). Export-led
growth enables a nation to achieve world-class scale while generating resources
for investment. As a result, all of western Germany shows up as affluent on
Figure 3.
Figure 3: Green=income
higher than average; pink-lower than average. Most of the UK is below
average. Most of Germany, northern
Italy, and Ireland are above average. The situation was the reverse in the 19th
century, with Britain well above average.
The UK has an unprecedented opportunity today to exploit the
low sterling exchange rate and departure from the EU by implementing policies
that promote manufacturing, reduce the weight of finance in the economy,
increase investment, and restrain consumption expenditure, while explaining to
voters that restraint today will lead to greater prosperity 5, 10, and 20 years
from today. Even in the hand-wringing New
York Times fret-fest, an alert reader can detect the positive impact of the
fall in sterling. Two manufacturers, one of fruit-flavored snacks, and another
in machinery, said they are currently seeking domestic alternatives to replace
imported supplies.
According to EU
data, after the 2016 devaluation of sterling, the UK now has unit labor
costs some 15% lower than Germany’s and 20% lower than France’s. But industrial
strategy must go further. Policies are needed to identify and encourage
investment in industries where Britain can boost global market share. A good indicator of what companies and
industries to target may come from a stock market index created last year by
accounting firm KPMG. The firm broke up Britain’s largest public companies into
a “UK 50” and a “non-UK 50”. The UK 50 derive more than 70% of their revenue
from the UK market while the non-UK 50 derives more than 70% of their revenue
from outside the UK. Figure 4 shows the differing stock market performance.
Many of the companies in the non-UK 50 fall into the industries cited above as
delivering strong recent growth. Underlying this growth strategy is recognition
of the fact that management, workers, and shareholders all do well if a company
does well. That mentality is a sea change from Britain’s 200-year-old tradition
of industrial class division and 1,000-year-old tradition of social class
division. Smaller countries (Norway and
Sweden for example) each have class divisions, but public awareness that they
are small countries competing for position in a much larger world have enabled
the industrial harmony and cooperation that led to success. Both countries have
much higher wages and living standards than the UK—or than the EU average. (In
fact, in 2016, UK average unit labor costs at €26.7 ($31) are slightly below
the EU average of €29.8 ($35).)
Figure 4: UK exporters
(the non-UK 50, red line) are growth
businesses as long as the pound remains
competitive.
Where do the Brexit negotiations figure in all this? As
Tennessee Williams warned us half a century ago, only a sick person in a mental
institution would depend on the kindness of strangers. The UK government should
enter these negotiations with a long-term industrial strategy for the economy,
and not lose sight of its goals. The EU needs the UK more than the UK needs the
EU. Last year, Britain ran a goods trade deficit with the EU of £96 billion
($125B). Its EU imports were 67% greater than its EU exports. EU nations have
far more to lose from a collapse in their UK trade than does the UK. Is it impossible to imagine London without
champagne or BMWs? That is precisely the question they are asking themselves in
Munich and Reims.
But it’s also important to remember that the EU is by far
the most important market for UK goods and services. For UK industry to
succeed, it has to measure itself, and compete against, the best in the world.
Helped by the falling pound, British exports to the EU rose 7.5% in 2016, much
faster than the growth rate of the EU economies. So the UK government should
approach these negotiations in a robust manner, but without forgetting that the
best guarantee of good trade relations is to make goods that customers want to
buy. If the initial deal is not perfect, EU member nation businesses will get
their governments to come back to the negotiating table in the future.
Diplomacy follows economic reality, not the other way round.
I can hear my friends in London, such as my onetime mentor, colleague
and great cynic, ex-Labour MP Brian Walden, protesting that there are very few
MPs at Westminster who would endorse such an audacious growth strategy or be
willing to face the electorate on such a self-denying “jam tomorrow” strategy.
To which I can only reply by quoting the great Tory leader Winston Churchill:
“The pessimist sees a difficulty in every opportunity. The
optimist sees an opportunity in every difficulty.”
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| Politicians at Remembrance Day ceremony: L-R: Tony Blair, Jeremy Corbyn, John Major, and current PM Theresa May. |
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