The Decline in UK Manufacturing (Economic Echo Vol. 2)

Once a global pioneer in manufacturing and innovation, the UK has slowly fallen down the global rankings of manufacturing nations. While it is common knowledge that the UK’s manufacturing sector is far behind the likes of China, the US, Japan, and Germany—who together account for over 58% of global production—just 15 years ago, it would have been hard to believe that the UK would be behind Italy. Yet, this is the current reality, and the outlook for British industry doesn’t seem promising.

In this edition, we explore the ongoing decline of UK manufacturing, examining the sector’s steady fall from global prominence and the key challenges driving this shift. From factory closures to rising unemployment and geopolitical uncertainties, we break down these pressing issues and their broader implications in the signature Economic Echo way.

Introduction

The UK manufacturing sector continues to face significant challenges, with factory closures and job losses mounting. Stellantis' recent decision to close its Vauxhall factory in Luton has highlighted the severe pressures facing the sector. The company cited high costs linked to meeting the UK’s Zero Emission Vehicle (ZEV) mandates and the additional trade barriers introduced by Brexit. This has put thousands of jobs and substantial investments at risk while disrupting the broader automotive supply chain. Industry leaders are increasingly concerned that strict sustainability targets are undermining the viability of domestic manufacturing.

Moreover, manufacturing output has stagnated, with production now 3.6% below pre-pandemic levels, while the rest of the economy has grown by 2.8%. Domestic demand (i.e. UK consumers) remains subdued as households grapple with higher prices and geopolitical uncertainties continue to disrupt global supply chains. This contraction in new orders and the backlog of work paints a grim outlook, with manufacturers bracing for another year of stagnation (little growth).

Labour market pressures persist as well. Following inflation, the minimum wage has increased, as have employee wage expectations. While vacancies have eased, long-standing skills gaps between old and new production methods hinder recovery efforts. Additionally, energy costs, though declining, remain high compared to pre-pandemic levels, adding another financial burden to manufacturers.

The urgency for structural reforms and investment has never been more apparent, as the UK’s industrial prominence continues to erode.

Quantifying the Decline

The UK’s share of global manufacturing output has fallen to approximately 1.65%, a significant decline from 4% in the 1970s.

In 2023, manufacturing contributed just $284 billion or roughly 8.5% to the UK’s GDP (Total Output). In comparison, Germany’s manufacturing sector contributed 20.4%, Italy’s 15.7%, France’s 9.7%, and the United States’ 10%. These figures underscore the UK’s relative decline in manufacturing output compared to its global peers, highlighting a significant shift in its economic structure over the past few decades.

The number of people employed in UK manufacturing has also dropped significantly, from 6.9 million in the 1970s to just 2.6 million today, despite the population increasing by 13 million during that time.

Key Causes

1. Deindustrialisation and the Shift to a Services-Dominated Economy:

   Over the past several decades, the UK has placed a greater emphasis on financial services, technology, and other sectors, leading to a relative neglect of manufacturing. This shift has resulted in a decline in industrial expertise and investment, weakening the sector.

2. Brexit’s Impact on Trade and Supply Chains:

   Brexit has created new trade barriers, including customs checks, tariffs (a tax on imported goods which pushes prices up), and logistical delays, all of which have made UK manufacturing less competitive. The loss of easy access to EU markets, once vital for UK exports through the free trade agreements (these agreements make selling goods in other EU countries almost as easy as selling within a company’s home country), has further constrained the sector.

3. Decline in Government Investment in Innovation:

   Insufficient research and development (R&D) investment in advanced manufacturing technologies has left the UK lagging behind nations like Germany and Japan. The lack of support for innovation through tax incentives for companies or subsidies (the government directly supporting the research funding) has impeded improvements in productivity and efficiency.

4. Increased Global Competition:

   Countries with lower production costs, like China and Vietnam, have attracted industries seeking cheaper labour and materials. This has made it increasingly difficult for UK manufacturers to compete on price, further eroding the sector’s global standing. For example, European electric vehicle manufacturers are struggling to compete with the cheaper Asian alternatives.

Implications

The decline in UK manufacturing has exacerbated regional disparities, particularly in areas historically relying on industrial activity for economic stability. The Midlands and the North, once the heart of Britain’s industrial output, have seen a significant loss of jobs and economic opportunities. In contrast, London and the South East, benefiting from the shift toward a services-based economy, have experienced growth, particularly in finance and technology. As a result, the economic divide between these regions has deepened, leaving industrial heartlands struggling with higher unemployment, reduced investment, and a weakened local economy.

The widening regional disparities have broader consequences. Areas hardest hit by deindustrialisation have seen population outflows as workers relocate to more prosperous regions. This not only drains local talent but also contributes to growing income inequality and regional dissatisfaction, leading to calls for more targeted support for struggling communities.

Furthermore, the UK’s weakened manufacturing base has intensified its growing trade deficit. A trade deficit is measured by calculating the balance of payments for a country. This is done by subtracting the total exports of a nation from its total imports:

Balance of payments = Exports (Value of goods sold abroad) - Imports (Money spent on foreign goods)

If the resulting number is negative, such as is the case for the UK, this is known as a trade deficit. If the number is positive, it is known as a trade surplus. A country must rely on financial mechanisms to sustain a trade deficit, such as attracting foreign investment, borrowing money, spending currency reserves, printing money or selling assets. A simple way to understand the concept is to picture your household income. If you spend more than you earn in a month, you either spend some of your savings, use credit (borrow money), or maybe sell some of your old stuff.

As Britain increasingly depends on imports for goods that were once produced domestically (in the UK) —such as cars, refined oil, power generators, pharmaceuticals, electrical goods, gas, clothing, and food products—its reliance on key trading partners like China, Germany, the US, Norway, and the Netherlands has grown.

While this reliance on imports is not an immediate concern, it could become a vulnerability in light of increasing geopolitical tensions. Over-reliance on external suppliers could expose the UK to disruptions in supply chains, trade restrictions, or price volatility during global crises, as seen during the COVID-19 pandemic and the onset of the Ukraine war, where consumers were stung by soaring prices and empty shelves. Strengthening domestic production capacity (how much the UK can produce itself) or fostering closer trade relationships with reliable partners could be key to mitigating these risks.

Future Outlook

Government and industry leaders are focusing on strategies to revive UK manufacturing:

1. Digital Transformation:

   Investment in advanced technologies like AI and robotics is increasing. About 70% of manufacturers are adopting digital solutions to improve efficiency and productivity. The shift toward "Industry 4.0" (more automated processes) positions the UK to remain competitive in high-tech manufacturing sectors.

2. Sustainability Initiatives:

   With a commitment to achieving net-zero emissions by 2050, many manufacturers are integrating green technologies and circular economy practices. These innovations reduce environmental impacts and meet growing consumer demand for eco-friendly products.

3. Onshoring and Supply Chain Resilience:

   Many firms are localising production (bringing it back to the UK) in response to recent global supply chain disruptions. This approach reduces reliance on volatile international trade conditions and strengthens domestic supply chains, contributing to more stable economic growth.

4. Addressing the Skills Gap:

   Attracting and developing a technically skilled workforce is critical. Programs focused on upskilling workers and bringing in younger talent aim to address the skills gap and ensure sustained growth in the manufacturing sector.

5. Regional Support and Investment:

   Targeted strategies to invest in regional infrastructure, foster innovation hubs, and create workforce development programs will be key to addressing the regional disparities caused by the decline in manufacturing.

Current Trends

Despite the challenges, there is potential for recovery:

• Growth in Output:

  The Bank of England predicted a 2.3% growth in manufacturing output for the second half of 2024, driven by strong domestic demand and a rebound in export markets (how much gets sold abroad).

• Technology Investments:

  Investment in new manufacturing technology is expected to grow by 8% in 2024, as companies look to modernise their processes and improve productivity.

• Export Performance:

  A weaker pound has made UK goods more competitive globally, with notable increases in exports from sectors like automotive and aerospace. This is because non-UK buyers get more British pounds for their currency, whilst the prices in pounds stay the same. This allows them to buy more British products for 0 extra cost.

  A simple way to think of this is to imagine you are going on holiday to America, and your hotel costs $100. If a currency ‘weakens’ that means the value of it decreases compared to other currencies. Therefore, if the value of the US dollar ‘weakens’, converting your pounds into dollars, you might get $130 for your £100 instead of before when you would only get $120. Because the prices in America remain the same, you would now have $30 left to spend instead of $20 even though it has still only cost you your £100. You can now buy $10 more of American stuff effectively for free!

While these strategies offer hope, their success will depend on sustained investment, policy stability, and addressing economic uncertainties, such as rising energy costs and ongoing geopolitical tensions.

Can the new UK Labour government help reinvigorate manufacturing and regain its competitive edge, or is the sector destined to play a minor role in the UK’s economy?

Thanks for reading! We’d love to hear your thoughts—whether it’s feedback on this edition or ideas for stories you’d like us to cover in future issues. Your input helps us make The Economic Echo even better.

Best wishes,

Harry and Reika

Co-Founders, Echonomics