In the face of coronavirus, we are now facing the possibility of a lost decade, with years of low or even negative growth. The government has been quick to provide emergency support to businesses through cash injections, job retention schemes, and deferred tax bills. But this will not be enough.
The UK government needs to turn all the levers of policy to supporting manufacturing because it is making things that generates the highest rates of growth. Without shifting our focus from banking and high-end services, which tend to be focussed in London, to heavy and light industry, which tends to be focussed largely in the Midlands and North, we will struggle to grow much more than at 1.0% per annum for the next decade.
The result with be joblessness, stagnating incomes and increasing inequality. The British economy may well have shrunk by 25 to 30 percent over the last month or so. Although some sectors will bounce back quickly, others will take much longer. If the year-on-year reduction in GDP between 2019 and 2020 is, say, 15 percent, 2021 might be 10 percent down on 2019 and 2021 perhaps 7.5 percent. It may well be until something like 2025 before it gets back to 2019 levels.
Even this relatively upbeat scenario may be too optimistic, especially when the costs of climate change, increased social care, our ageing population, pressures on our healthcare system and restoring recent cuts in education and training are all taken into account. What can we do to make things better?
We need to start by reversing the key catastrophic policy mistake of the last three decades: we need to realise that growth comes largely from manufacturing and not from services. If, therefore, we are going to give the economy a chance to grow more quickly, we have to increase the proportion of our GDP coming from manufacturing to around 15 percent from its current 10 percent.
Economic growth is largely the result of a narrow range of investment opportunities, clustered around mechanisation, technology and power. Even before coronavirus hit, UK investment in these key areas was far below levels in other higher-growth countries. This explains why productivity in the UK has been almost static, our growth rate has been so low, and why wages have stagnated.
The natural home for these investment opportunities is in the privately-owned, highly-competitive, internationally-traded light industrial sector – manufacturing everything from cookware to Christmas lights, from pressure washers to clothing – and this is what has collapsed in the UK. Even as late as 1970, nearly a third of our GDP came from manufacturing. Now it is less than 10 percent.
Globalisation and liberalisation certainly have their upsides in spurring international competition. They also, however, have major downsides if the result is for some countries – such as China, Germany, Switzerland, and the Netherlands – to collar much more than their fair share of manufacturing industry, leaving countries like the UK and the USA deindustrialised, with huge balance of payments deficits, stagnant productivity and wages, and ever-mounting debt problems.
The key message, then, is that the UK economy needs to be reoriented towards exports and manufacturing rather than being driven by services, imports and debt. How can this to be done? There is a straightforward but politically very difficult answer.
We need a more competitive environment for light industry in the UK. One important component of making the UK more competitive is a monetary and fiscal environment that encourages manufacturing, and that means a lower exchange rate, so that it becomes profitable to invest in a new manufacturing plant in the UK instead of elsewhere. We need to change our banking and monetary priorities to make sure that this happens.
As happened in Japan after World War II, we need to direct our banking system towards making plenty of money available on easy terms to the manufacturing industry at the same time that we make sure that it is put to productive use by having a low enough exchange rate to make the most productive sorts of investment highly profitable. This way we could lift the economy’s growth rate by at least a couple of percent per annum, above what it would otherwise be.
This is the growth we so badly need to recover from coronavirus. With export-led growth at the forefront, we might be able to get back to our 2019 level of GDP within two or three years. Without it, we will very probably have lower productivity and much lower real wages in 2030 than in 2020, while we slip further and further down the international rankings, while other Asian economies continue to power ahead. This is the scenario that we are facing unless we get a grip on our future.