The Left has long insisted that Margaret Thatcher destroyed our manufacturing base and created an economy almost wholly reliant on services, in particular the inherent vice of economic production: finance.
Like most myths, there an element of truth to it, even though the claim is confused and exaggerated. Those who cling to it like to point towards our continental neighbours as examples of more “balanced” economies. They often fetishise Germany – and France too. But in reality, the makeup of the UK economy is not as different as the constant and assertive arguments about its supposed imbalance might lead you to believe.
For one thing, manufacturing production in absolute terms has never trended downwards – only upwards. It has only declined relatively as a percentage of the economy, because services have grown at a faster pace.
Furthermore – and I make a pedantic point here – a key component of the “we don’t make anything any more” myth was the closing down of the mines en masse in the late 70s and 80s. Mining is, in fact, part of industrial production, not manufacturing. Industrial production is manufacturing combined with mining and utilities output.
It’s important to make the point because manufacturing is regularly used synonymously with industrial production. However, what people mostly mean when they say the UK doesn’t make anything any more is that the UK no longer has much industrial production – which is why I compare industrial production statistics, not solely manufacturing.
In 2016, the composition of Germany’s economy was 0.8 per cent agricultural, 28.1 per cent industrial and 71.1 per cent services. France’s economic composition was 1.9 per cent agricultural, 18.3 per cent industrial and 79.8 per cent services. In comparison the UK’s economic composition was 0.7 per cent agricultural, 21 per cent industrial and 78.3 per cent services.
This is the story across the developed world. The difference between the “manufacturing” economies and the service dominated ones is scarcely a 10 per cent one. Hardly cause to scream blue murder at the perceived lack of industrial output in the UK.
Nonetheless, there is a modicum of truth in the idea that the UK economy is too reliant on financial services and could certainly boost its manufacturing output. Manufacturing was only 10 per cent of GDP in 2016, low among the G20 nations.
As a portion of the UK economy, financial services comprised 9.1 per cent in 2009, before the Great Recession took its toll; it stood at 7.2 per cent in 2016. For comparison, within OECD countries, in 2009 only Ireland and Switzerland had higher percentages. In 2016, only Switzerland had a higher percentage, at 9.7 per cent. This undoubtedly leaves the UK far too exposed to finance-related economic downturns – as per 2008.
It’s no small irony that the most hard-line Remainers are among those most concerned about the imbalances of the UK economy. Yet Brexit has huge potential to rebalance the UK’s economy.
The large fall in the pound’s value has already provided a considerable boost to UK manufacturers. Before the Brexit vote, the pound was overvalued, according to the IMF, by between 5 and 20 per cent. Since the vote it has fallen well within this range.
Depending on the type of deal the UK settles with the EU, the value of the pound is unlikely to rise to where it was before the EU Referendum in the medium term. This means exporters will continue to trade with a tail wind for the foreseeable future.
The other possible effect of Brexit is that some of the big names in financial services may move jobs to the continent to ensure free access to the Single Market. This effect will probably be rather limited. London has too many competitive advantages to cease being a world-leading financial centre, though it seems plausible a small percentage of jobs may move to Paris or Frankfurt.
But there are a number of other ways the UK economy can move onto a stronger footing post Brexit. The introduction of free ports – effectively impossible while within the Customs Union – could greatly benefit the UK’s port towns. A good portion of these towns are located in the North and in areas of relative poverty. Most are also outside the congested and already economic developed area of the South East.
Free ports would go a long way towards addressing the double-headed inequity of a bias towards services in the UK economy and the North-South divide. UK ports are some of the world’s most advanced, and with countries queueing up to sign trade deals with us after Brexit, this could be a major source of extra economic growth.
There is also the likelihood that the UK fishing industry will start to grow strongly, given the right policy from Government, when we leave the Common Fisheries Policy. Again, the towns and cities ripe to reap the rewards of this are located in relatively poorer areas, far from the South East of the UK.
There are no panaceas in economics, but contrary to what you will hear from Project Fear, Brexit has the potential to alleviate some of the most enduring problems of the UK economy in recent times. The UK after Brexit may not only succeed in putting its economy onto a more sustainable and equitable footing, but could also become a major centre of economic growth in Europe.