Is Advanced Manufacturing the Answer to the UK’s Problems?

Britain has historically relied on manufacturing as a means to drive prosperity and create "good" jobs. From the late 1940s to the 1980s, the British government implemented measures such as nationalisation and imposing high taxes on the service sector to shield manufacturing from competition and maintain high employment levels. 

Successive governments also employed subsidies and planning controls to address regional imbalances, inhibiting growth in prosperous areas while supporting struggling ones.

Despite significant economic transformations, a recent analysis shows that the belief in manufacturing as a key to future prosperity persists among policymakers. In 2011, then-Chancellor George Osborne envisioned "a Britain carried aloft by the march of the makers." 

The May government that followed developed an industrial strategy centred on manufacturing, and most recently, Labour has promoted an industrial strategy combined with environmental commitments to rebalance the economy and create hundreds of thousands of jobs.

 Fig 1: Annualised growth in GVA per hour, 1998-2023. Source: ONS; Centre for Cities’ calculations

Data from the Office for National Statistics (ONS) highlights manufacturing’s significant contribution to productivity. In 2021, manufacturing generated a gross value added (GVA) of £45.62 per hour, outpacing the economy-wide average by £6, and exceeding the productivity of the construction and accommodation sectors by £10 and £20, respectively. 

Among major sectors, only IT and communications surpass manufacturing in productivity. Between 1998 and 2023, manufacturing productivity grew at an impressive annual rate of 3.9%, significantly higher than the overall economy’s growth rate of 1% per year.

These statistics underscore the potential of manufacturing to enhance local economies, particularly in regions where high-end services are not viable. Manufacturing can offer a productivity boost in areas reliant on less productive sectors like transport and storage.

However, productivity gains in manufacturing often come at the expense of employment. The decline in manufacturing employment since the 1960s has not corresponded with a decrease in output. The current industrial sector produces approximately double the output of the 1960s with less than half the workforce. This trend is attributed to firms in high-wage economies surviving by shifting to high-value, low-volume production or by automating processes, thereby reducing the need for human labour. 

Fig 2: Index of US employment growth since 2010 in manufacturing and other sectors. Source: Federal Reserve Bank of St. Louis

Data and trends in the US corroborate this. For instance, despite substantial federal investment in manufacturing through the CHIPS and Inflation Reduction Acts, industrial employment has remained stagnant, even as the broader economy grows. 

Moreover, manufacturing jobs tend to be polarised, with a bifurcation between high-skilled, high-income roles and low-skilled, low-income positions. This has resulted in a decline in mid-level jobs traditionally accessible to those without higher education, which is evidenced by a reduction in skilled tradespeople and machine operatives since the 1990s.

Globally there has also been a major shift to services with Britain for instance now the world’s second-largest exporter of services. Since 1995, output in service export activities, such as insurance and finance, has more than doubled, while manufacturing output has increased by about 50%. 

This shift indicates that manufacturing represents a decreasing proportion of Britain’s exports, a trend likely to continue unless countered by significant national investment. The efficacy of such an approach is already questionable with experts pointing to the recent US experiences.

 In light of this understanding, UK manufacturers need to focus on producing specialised, high-value products that are difficult to replicate. This involves investing in research and development (R&D) to innovate and develop unique products with superior features or customised solutions that meet specific customer needs. Sectors such as aerospace, pharmaceuticals, and advanced engineering could offer significant opportunities for growth through specialisation.

 For policymakers, it is a wake-up call to avoid an exclusive focus on manufacturing and instead aim to foster growth across all exporting sectors to achieve more balanced and sustainable economic growth. Particularly in major cities, supporting the service sector could be crucial for economic development and could help spur manufacturing in other areas.