Stable wages and improved productivity over the past decade made the UK increasingly competitive even compared to many Eastern European countries
The UK is recovering its mantle as a global manufacturing hub and is now one of the cheapest locations to produce goods in Western Europe, according to a ringing endorsement from one of the world’s leading consultancy groups.
Direct manufacturing costs in the UK have improved by up to 10 percentage points compared to other Western European countries thanks to stable wages and improved productivity over the past decade.
The trend is so pronounced that the UK is even becoming increasingly competitive compared to many Eastern European countries like Poland and the Czech Republic, according to a new study by the Boston Consulting Group.
Wage costs – defined by the consultancy as the amount companies need to pay for an extra unit of work – have increased by 16pc in the UK over the past decade. By contrast, wage costs have increased 52pc in France over the same time period and by 62pc in Italy. The competitiveness of a number of European countries has been stymied by inflexible labour laws and a lack of investment in technology and infrastructure.
The full report by the BCG into the world’s 25 leading export nations has been a released a week after UK data showed that earnings have fallen for the first time in five years. This forced the Bank of England to make a big downward revision to its forecasts for annual earnings growth in the last quarter of this year – from 2.5pc to 1.25pc. Governor Mark Carney said that earnings growth has been “remarkably weak, even as unemployment has fallen rapidly”.
The low earnings growth has occurred despite a surging economy with the Bank now predicting that that GDP will grow by 3.5pc this year and 3pc in 2015. The BCG report appears to suggest that the two factors are different sides of the same coin, with cheaper labour spurring investment in the UK, driving growth and helping to increase the number of jobs.
The BCG classes the UK along with the Netherlands, Indonesia and India as “regional rising stars” and says that it has emerged as “the lowest-cost manufacturing economy of Western Europe”. As well as low labour costs, BCG cites the UK’s low corporate tax rates and flexible labour market as major competitive advantages.
Taken together these trends are slowing the drive among companies to outsource manufacturing to countries in Eastern Europe, South America and Asia that were traditionally seen as being low-cost.
Mr Ramachandran highlighted the aerospace and automotive industries as two in which the trend towards “onshoring” has been most pronounced. He pointed to the acquisition of Jaguar Land Rover by India’s Tata Motors in 2008. At the time this raised concerns that jobs and investment would be shipped off to Asia. In fact, the reverse has been true with the company investing in a number of facilities in the UK and creating an additional 1,700 jobs at its Solihull facility by next year.
The BCG study looked at a number of factors, including labour and energy, to compare the manufacturing costs of the 25 top exporting countries in the world relative to the US. Many of the traditional high-cost countries in Europe have lost further ground in the past decade due to weak productivity growth and rising energy costs, according to the study. These include France, Italy, Belgium, Sweden and Switzerland.