UK manufacturing: Time to be upbeat?

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Is it time to be upbeat about UK manufacturing?

That's the takeaway from two reports today from the CBI and the Society for Motor Manufacturers and Traders (SMMT).

The reasons echo my report on the robust growth of US manufacturing, but with a crucial difference: where the demand is coming from.

The similarities are found in the impact of lower oil prices. The CBI says that UK manufacturers are upbeat as cheaper energy lowers production costs. Manufacturers' order books have climbed to a six month high, and 16 out of 18 industrial sectors expect to grow in the next quarter.

Change in demand

For the US, lower oil costs have made a big difference too. Although US wages are considerably higher than that of China, overall costs are falling because of cheaper energy and higher American productivity that justifies the higher labour costs has led to the re-shoring of manufacturing back to the US.

But a crucial difference is in terms of where demand is coming from. The manufacturers that I spoke to in America, including foreign companies such as Siemens who were now basing production in the US, all pointed to the benefits of localisation since the US is the biggest market in the world.

By contrast, Britain is a smaller market that is one-fifth the size of the US population but has grown well by being an open economy. A striking reminder is in the SMMT report where 80% of the cars made in Britain, so 1.2 million cars in 2014, were shipped to more than 100 countries.

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Notably, China has become the single largest market for British-made cars from the UK itself.

The SMMT also points to fast growth in Asia as one of the reasons why cars now make up 11% of British exports by revenue, its highest share. Demand from China has grown by more than 600% since 2009, which takes the total to 137,410 cars, just less than the 151,472 sold to America.

Since 60% of British-made cars are "premium", such as Rolls-Royce, Bentley, Aston Martin, Jaguar Land Rover, that seems to suit the rich Chinese who tend to buy luxury brands.

So, higher incomes in China are a boon for British exporters, while the same rising wages are driving production back to the US. Plus, both countries are seeing the benefits of cheaper energy, not just in production but also for consumers.

We are hearing more and more about the hundreds of millions of people in emerging markets joining the middle class around the world. It seems that advanced economies like the UK and US are already benefitting.