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Those who are confident that the UK economy is sustainably on the mend — encouraged, no doubt, by the Bank of England forecast of as much as 3.4 per cent growth in 2014 — might like to ponder two aspects of our economic performance. The first is that net investment in the UK economy, measured per head of the population, has ground to a halt. The second is that the proportion of UK national income derived nowadays from manufacturing is barely 10 per cent. As we depend on manufactures to a large extent for our export revenues, our weak manufacturing base means that we cannot pay our way in the world.

There are two ways to measure how much of our GDP is accounted for by investment for the future. One is gross and the other is net of depreciation of existing capital assets. Measured gross, the UK now has one of the lowest ratios in the world. A recent CIA report showed the UK with 14.2 per cent in 2012, ranking us 142nd — equal with El Salvador — out of the 156 economies in the survey. The world average was 23.8 per cent. The figure for China was 46.4 per cent. 

This gross figure is bad enough, but the net position is even worse. Depreciation of existing capital assets — otherwise known as capital consumption — is running in the UK at just over 11 per cent of GDP. This means that our net investment as a percentage of GDP is about 2.3 per cent. If our population was static, this low percentage would at least show some improvement, however small. Unfortunately, it does not account for population growth, which is around 350,000 per annum. 

The figure for average UK historically accumulated capital assets per head is about £120,000. Just to keep up this stock per head involves capital expenditure of £42 billion per annum. This is nearly equal to 2.3 per cent of our national income. The end result is effectively no net investment per capita. All the advances in living standards since the Industrial Revolution have been achieved on the back of capital accumulation. It is very difficult to see how any sustainable increase in productivity and living standards can be achieved if we have stopped investing in our future.

Part of the reason why our investment rate is so low is that manufacturing as a percentage of national income which has fallen. In 1970 it was 32 per cent of national income. In 1980 it was 24 per cent. By 1997 it was 14.5 per cent. It is now barely 10 per cent. About 60 per cent of our exports (and more than three-quarters of our imports) are goods rather than services and about 75 per cent of those goods are manufactures. Until the early 1980s we used to export far more manufactured goods than we imported. Indeed, this is how the UK accumulated much of its internationally owned wealth in the 19th century. This, however, has not been the case for some time. We have had a deficit every year since 1983 and as a result an overall payments deficiency every year since 1984. In 2012, our deficit on manufactures alone was about £85 billion.

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boyinthebubble
April 11th, 2014
7:04 PM
A major contributor to Britain's economic problems has always been the woeful economic ignorance of even its supposedly educated citizens http://www.adamsmith.org/research/articles/the-consequences-of-economic-...

Larry E
April 1st, 2014
6:04 AM
The article is a good thumbnail picture of the economic problems caused by lack of manufacturing. We have that problem, in spades, here in the U.S. But the seers and pundits refuse to admit it; there is a pious, "Emperor's New Clothes" aura surrounding our decision to divest ourselves of our manufacturing sector through deals like NAFTA and others. But as in the UK, when it is "much more expensive to produce almost anything [at home] than it is elsewhere," "free-trade" deals like NAFTA just facilitate capital flight, disinvestment, the off-shoring of factories, and the impoverishment of our society. But our leaders and betters subscribe to the Idiot's Theory of Economics -- that the role of producing goods doesn't matter; that it is irrelevant whether we retain our factories, capital, and jobs, or whether those things are packed up and shipped to foreign countries. We produce less and less, we consume more and more, and we borrow to cover the difference. We have, in Pravda's words, a "produce in China, sell in the West" policy. And when Pravda knows more about economics than we do, we're in trouble.

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