Why the government has failed to live up to its rhetoric on rebalancing the economy

Joe Wright, 28 January 2015

After five years of the government’s strategy to rebalance the economy, manufacturing and construction continue to flounder. Yesterday’s GDP figures show 0.5 per cent growth – wholly driven by services. Low inflation and a fall in oil prices have created a small boon in consumer spending, plus households are borrowing more as credit controls have loosened. Outside of the services sectors (the main beneficiaries of these trends) construction is down by 1.8 per cent, while the Purchasing Managers’ Index which measures industrial growth dropped from 53.3 to 52.5. Across the parliament, the ONS estimates that services is the only part of the economy to have surpassed its pre-recession peak, meaning there has been no real growth in Britain’s industrial base or construction at all.

It is unsurprising then that the rebalancing rhetoric which, alongside fiscal restraint, comprised the Chancellors ‘long term economic plan’ no longer features in his statements. The UK is more unbalanced now than in 2010.

Why manufacturers have struggled is unclear. Cheap oil prices, a significant factor in costs, should mean better results for production too. The SME credit shortage singled out as a major factor in the UK’s prolonged economic downturn has been shown to be somewhat overstated – such as by the think tank Demos which found last year that only 1 in 25 SMEs had been refused a loan and half do not borrow at all.

The easy answer, which the government will use, is that tempered demand in the Eurozone continues to effect sales and therefore growth. EU member states like Germany and France are among the UK’s largest trading partners. Part of the government’s rebalancing strategy, however, sought to get manufacturers entering new markets, particularly developing ones, through the UK Trade and Investment department. If Europe is solely to blame, then there has been some failure on the part of UKTI to make an impact.

Other theories point toward home-grown problems. The shortage of skilled workers for manufacturing is a consistent bugbear of industry representatives. Engineering in particular fails to attract enough students to meet demand, along with a multitude of other technology-based subjects. Many firms look abroad to fill positions, but the UK’s failure to produce the right kind of labour market maybe registering in growth figures.

The likelihood is a mixture of all the above, plus the sheer scale of the task. The knowledge and skills which underpin manufacturing will take decades to regain. Though global circumstances and the sheer size of the task have worked against the government, they have only themselves to blame for promising to reset the trajectory of the UK economy in just five years. So far they have made only a poor start and will not see any benefits for years to come.

However, looking ahead to the elections, it is unlikely that the unbalanced recovery will pose too much danger for the Coalition parties, even if the next figures contain the same mixed results. The debate has already shifted to more contentious matters like the NHS and welfare.