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Artillery Row

UK manufacturing is significantly outperforming as a result of Brexit

The doomsters are wrong about Brexit — again

We have become used to the mainstream media and various “independent experts” claiming that Brexit has been an economic disaster for the UK.

Recent ONS GDP revisions have rather stymied that argument, as I outline here. Indeed, the UK’s economic performance has actually been stronger than presented. In particular, as I have written, UK exports have reached record levels in value terms and are performing in line with historic trend (in goods) and above historic trend (in services) in volume terms. Contrary to the mainstream narrative, UK performance is broadly comparable to the performance of other G7 nations.

Catherine McBride of the IEA also recently published on UK export performance since Brexit in her report “Has Brexit Really Harmed UK Trade? Countering the Office for Budget Responsibility’s claims”. In it she states:

Whilst the data is still emerging and longer-term effects are as-yet unknowable, in general, there has been no real disparity between UK trade with EU and non-EU countries. Nor has there been a sharp fall in UK–EU trade either at the aggregate or sector level despite it now being seven years since the vote to leave the EU and three years since the UK actually left. Regardless of the final effect of Brexit, it is hard to see any basis for continued acceptance of the OBR’s projection of a 4 per cent drop in relative long-run productivity given the emerging data.

So far so good regarding exports. Today I thought I would take a look at UK industrial production in general and manufacturing in particular. This is an important area to look at because it is front and centre in the economic argument between those who think Brexit will be an economic success and those who think it will be or has already been an economic disaster.

For the latter, the argument is that increased trade friction between the UK and the EU (from leaving the single market and the customs union) will lead to declining UK industrial production as the UK is excluded from pan European supply chains.

For the former, the argument is that increased trade friction between the UK and the EU will boost UK industrial production as supply chains that moved to the EU during UK membership re-shore to the UK, whilst pan-European supply chains will be broadly unaffected as they mostly involve large companies operating to global standards who can easily manage the increased “paperwork”.

The argument that supply chains/production shifted from the UK to the EU after the single market came into force in 1993 is not a particularly contentious one, and it is clearly demonstrated by looking at the UK balance of trade with EU and non EU countries.

As you can see, the UK moved from a trade surplus with the EU prior to the advent of the single market, to a large and ever growing trade deficit. Over the same time period, meanwhile, the UK moved into a smaller but also growing trade surplus with the rest of the world.

I had hoped that the balance of trade figures would by now give us a clue as to which of these arguments was “winning”. If Brexit supporters were right, we should start to see a reduction in the UK trade deficit with the EU. Whilst there were some signs of that from 2018, it has entirely reversed since 2021.

However, the reality is the Covid lockdowns and the energy crisis (gas imports and re-exports) dwarf any Brexit effects and make any serious analysis impossible.

Whilst the balance of trade figures are not (currently) useful in this debate, it does not mean that other data can’t point to trends that support or contradict the two arguments.

Specifically we can compare the performance of industrial production and manufacturing since Brexit between the UK and other comparable countries. If the Brexit opponents are right, we should see signs of relative underperformance as UK PLC is removed from pan-European supply chains. If the Brexit supporters are right, we should see a UK outperformance as supply chains revert to the UK.

For the data I have turned to the OECD here. I have chosen to use its volume rather than value measure, as some commentators believe that this better demonstrates the underlying trends by stripping out inflation.

The OECD describes its calculation method as such:

Industrial production refers to the output of industrial establishments and covers sectors such as mining, manufacturing, electricity, gas and steam and air-conditioning. This indicator is measured in an index based on a reference period that expresses change in the volume of production output.

The data is indexed to 2015.

Below is a chart comparing the industrial production performance of the UK versus France, Germany, Italy, USA and the G7 since Q1 2015.

As you can see from the chart, the UK has grown industrial production by 3.6 per cent over this period at a time when Germany industrial production has fallen 3 per cent, the USA and G7 fallen 0.6 per cent, and France grown only 0.9 per cent. Only Italy, which has been experiencing a temporary construction boom, has grown faster than the UK over this period.

Of course, industrial production includes mining and construction et cetera so an argument could be made that this does not reflect the underlying trends in manufacturing. For that reason I decided to look at the data for manufacturing alone.

Below is a chart comparing the performance of UK manufacturing versus France, Germany, Italy and the USA (unfortunately the data is not available for the G7) since Q1 2015.

As you can see from the chart, the outperformance of the UK in manufacturing alone is even greater than for total industrial production, with the shift seemingly beginning in 2017.

If we look at the data from Q2 2016 (i.e. from the vote to leave the European Union), UK manufacturing volumes have grown 7.5 per cent up to Q3 2023. For comparison, over the same period Germany manufacturing production volumes are down 3.9 per cent — worse than the fall in total industrial production.

The USA has barely grown at all (+0.2 per cent), France is up only 0.7 per cent whilst UK growth is a full three times greater than that of the next best performer, Italy.

How does this post Brexit performance compare to the long term trends?

In the chart below I look at manufacturing production for France, Germany, Italy, UK and the USA since Q1 2008 — i.e. before the great financial crash.

As you can see, the UK’s outperformance since leaving the EU is not typical of the long term trend where growth has tended to be lower than the peer group.

Indeed the data demonstrates just how much the world has changed since the financial crisis, with Italy, France, the USA and Germany all still below Q1 2008 levels. Italian manufacturing and total industrial production is a fifth lower than 2008.

In fact of all the G7 countries, only the UK has registered any growth in manufacturing volumes at all over that time period, with volumes up 6.4 per cent versus -4.7 per cent for Germany and -7.4 per cent for the USA

It is clear that when it comes to manufacturing volumes, the UK is a very significant outlier.

The degree of outperformance is especially clear when you look at the trend line for each country individually.

The collapse in Italian manufacturing volumes is obvious:

As is the downward trend for France:

Germany is barely rising:

As is the USA:

Only the UK has a very clear growth trend line

Assuming the OECD data is correct (a big “if” these days), the analysis above would suggest that something very UK-specific is happening to industrial and manufacturing production. The most logical conclusion to draw, considering the timing, would be Brexit and reshoring.

It would seem those who argued Brexit would see supply chains reshored were correct. Cadbury relocating production from Germany to the UK is not an isolated incident. Meanwhile the UK’s role in pan European supply chains does not seem to have been negatively affected, as large companies have been able to easily and for negligible cost adapt to the new paperwork. This was a point made by Alan Johnson, Nissan’s senior vice-president of manufacturing and supply chain, as he announced a further £2 billion investment in Nissan Sunderland.

Not that I think this means the UK economy is performing well. Quite the opposite. The whole of the West is struggling with issues of poor productivity and lack of investment — in no small part driven by ludicrous energy policies which are inevitably leading to de-industrialisation and economic decline.

Nor am I saying that the UK could not be doing a lot more to attract the 25 per cent of global trade that Mckinsey estimates will shift within the next decade or so (that’s $4.5 trillion worth of trade — 1.5x UK GDP). If you are interested, I outline how a UK Government could relatively easily boost productivity, drive investment, and generate economic and political rebalancing here.

On the question of whether Brexit would be positive or negative for UK manufacturing and industrial production, though, the data seems unequivocal. The doomsayers are simply wrong. Overall Brexit has (so far) significantly boosted the sector.

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