WSJ: U.K. Data Stoke Worries on Growth

EUROPE NEWS|APRIL 7, 2011
U.K. Data Stoke Worries on Growth

By ALISTAIR MACDONALD

LONDON—U.K. manufacturing suffered a sharp slowdown in February after several months as the economy's star performer, stoking doubts about the sector's ability to lead Britain's fragile economy back to health, as it has in Germany.

After the financial crisis, British politicians promised to rebalance the economy away from the large financial sector. With the pound low and international trade rebounding, manufacturing in the U.K. grew 3.6% last year, its fastest rate of expansion since 1994 and well ahead of the 1.3% growth for the economy as a whole.

On Wednesday, industrial-production data showed that U.K. manufacturing output was flat in February from January. Data released Wednesday in Germany showed German manufacturing orders climbed 2.4% on the month in February.

"It does say manufacturing [in the U.K.] is not bouncing back as rapidly as we would like, yet hopes for growth are pinned on this sector," said Neil Blake, an economist at the Ernst & Young ITEM Club of economic forecasters.

Even if manufacturing growth becomes a long-term fixture, it still may not offer a significant boost. Manufacturing currently accounts for only around 11% of the U.K.'s gross domestic product and 8% of overall employment.

Though one month's data are inconclusive, U.K. manufacturers already were facing pressure: They likely will need to increase prices to match the inflation rate, which has been rising rapidly over the past year, particularly in recent months.

Companies have already replenished inventories they ran down during the recession. And the pound is off its lows from early last year.

A recent survey by accountants BDO LLP underscored that British manufacturers themselves aren't yet convinced that the recovery is long term; most said they plan only small-scale investments, and recent and planned hiring increases are through temporary contracts or by using part-time workers.

As Republicans and Democrats argued over how to tackle the U.S. deficit, the start of the U.K.'s new fiscal year on Wednesday sounded the starting gun for an aggressive program of tax increases and spending cuts that is expected to hurt domestic demand. Income and payroll taxes are both going up this week in the U.K.

Amid that bleak picture, British lawmakers look with envy at Germany, where manufacturing is responsible for 24% of a currently booming economy.

German experts typically put the difference with the U.K. down to better German vocational training and the direct involvement of businesses in German education. German youths can take apprenticeships that combine practical work training in a business with weekly attendance of vocational schools called Berufsschulen. Courses at the Berufsschulen are designed in part by entrepreneurs. The U.K. has no close equivalent.

Germany has also been more successful in exporting to the world's fastest-growing markets. Almost 6% of German exports go to China, 1% to India, 2.6% to Russia, and 1.1% to Brazil. All four of those countries combined account for just 5.7% of U.K. exports.

British manufacturers say their problems begin with schools, and with a lack of interest in engineering and technology.

Admissions to engineering and technology undergraduate degree programs increased 19.5% from 1999 to 2009, while media-studies admissions more than doubled in the period. Manufacturers said engineering graduates were often cherry-picked by the finance industry.

For years Gary Lydiat, chief executive of Kilfrost, a specialist chemical manufacturer in the north of England, says he struggled to fill postgraduate jobs, partly because talent was flowing to financial-services companies.

In Britain, unlike in the U.S. and Germany, companies and higher education don't mix much. Manufacturers complain that universities are too focused on developing and selling patents rather than developing the actual technologies, which soon vanish abroad.

Still, British manufacturers say the situation is improving. Loughborough University in Leicestershire, England, one of the U.K.'s top engineering universities, says applications for engineering degree courses are up 25% since 2006, when the university struggled to fill some classes. James Dyson, who heads appliance maker Dyson Ltd., says British universities and companies are reaching out to each other more now. Dyson Ltd. now works closely with three U.K. universities, he says.

The U.K. government has said it plans to set up a network of technology and innovation centers in which companies can get access to equipment and expertise and conduct research and development, and that it will provide funding for an extra 75,000 apprenticeships over the next four years.

Prime Minister David Cameron also has initiated a major push for trade with large emerging markets.

—Patrick McGroarty contributed to this article.
Write to Alistair MacDonald at alistair.macdonald@wsj.com

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