During a recession the temptation for the government is understandably to find GDP growth from anywhere, even if that means ignoring emerging long-term trends as something we can tackle when the economy is stronger. Especially approaching an election, it can be seen as decadent to believe that we economic ‘beggars’ should also try to be ‘choosers’ over what type of economic growth we desire.
However, as a child of Thatcher, what I always admired about the Iron Lady was that even in the darkest economic times, she was willing to not just go after the low hanging fruit of economic growth, but risk more pain in order to pursue the right long-term trajectory for the UK economy.
It is for this reason that the recently announced 0.6% growth in Q2 and the continued fall in unemployment, whilst undoubtedly positive in the short-term, is not unalloyed good news in the long term. Specifically the much talked about rebalancing of the economy to manufacturing and exports is just not happening.
I greatly enjoyed Mr Osborne’s proud declaration in 2011 that his Conservative-led recovery would herald “a march of the makers”. This is not because of some banal grudge at the financial services sector, or a desire to return to a promised golden age when Britain made things. The need to focus on long-term growth in manufacturing is due to the effect of the digital revolution on middleman services like retail.
I was reminded of this recently when I read the speech by Sir Martin Sorrell at last month’s WWP event ‘The Future of Retail. Sir Martin compared the impact of ecommerce on the retail sector to it’s recent devastation of industries like music and newspapers. Those content providing industries had existed as essential middlemen in the pre-digital age, brokering relationships between content creators and content consumers. However just as the UK consumer no longer needs HMV to find its music, or Blockbusters to acquire the latest movies, so all retailers are under threat because their position as essential middlemen for creators and manufacturers is no longer required.
In a world where P&G is selling 75% of its nappies online and direct to consumer and even my dad has his own eBay shop, it is not clear to me that most manufacturers will need retailers in the future to reach consumers. Over recent decades many western economies have profited from high-margin ‘value added’ services like retail, where products have been manufactured abroad in low-cost countries, but sold to a local western market through British retailers who profit from the scarcity of physical high-street stores. So whilst competition on the high-street was fierce, prices were higher due to the need to have a british based retailer with a physical location, but digital technology and ecommerce changes all that.
HMV was one of the early casualties of ‘Showrooming’ the term used to describe the common act of customers browsing their in-store stock of music, games and DVDs, only to then purchase the item cheaper on Amazon, eBay or other online providers. With a recent report estimating that 63% of smartphone owners check prices online while in-store this trend for ‘Showrooming’ is set to only get worse for retailers. Whereas once high-street retailers could demand a high-margin profit because they owned the physical stores, now these physical retail spaces are the deadweight overhead that is destroying their cost model.
In the years to come the Left will inevitably argue for the protectionist measures required to ‘Save our high street’ but not only does economic protectionism not work, it will be impossible in this case because the internet is a global market, not a British one.
The naysayers will argue that British manufacturers cannot compete on price with low-wage countries like China, but this is also to miss the awesome potential of technologies like Additive printing (a.k.a. 3D printing) which will turn manufacturers away form needing to ‘own the means of production’ and increasingly towards ‘value-adding’ design, innovation and creative skills.
The UK with its creative, educated and high-cost workforce can dominate global manufacturing if it has the vision to recognise that when our economy recovers from this current recession it will be existing in a reality that has been reshaped by another industrial revolution. Hence the future will not look like the past and if Britain grabs just any economic growth on offer instead of trying to rebalance the economy towards manufacturing and exports then it will be the ‘march of foreign makers’ that trample over this nation of shop-keepers.
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