An instructive tempest in a teapot

Buttonwood

Apr 12th 2005
From The Economist Global Agenda

The collapse of MG Rover, Britain’s last independent volume carmaker, has prompted gloomy thoughts of post-imperial decline. They are misguided

IT MAY seem strange to worry about a small British carmaker going out of business at a time when the titans of tin, General Motors and Ford, are trembling. But Buttonwood has happy memories of scooting around in her first owned car: a faded cherry-red, British-built Mini, which later saw active duty as a neighbouring farmer’s chicken coop. So when MG Rover, the much-reduced descendant of the firm that made that car, stopped production at its Longbridge factory and was placed into administration late last week, there was a sense that more than one era had drawn to a close.

Coverage of this event in the British press rivalled that of the pope’s funeral, Prince Charles’s wedding and even the Grand National steeplechase for column inches. The broad tenor of most comment was that Britain had now touched bottom as an industrial nation; that in continental Europe they manage these things better; and that only fish-and-chips-frying awaits the country that gave the world steam engines.

Rover’s collapse says a lot about visionless bosses failing to fight global headwinds and a certain amount about the delusions of its latter-day owner/managers. Is it equally damning about Britain’s economy and, by extension, its stockmarket?

What’s in a name?

It is true that Britain no longer makes a lot of the things it did. Value added in manufacturing accounted for almost 16% of GDP in 2002, on figures from the OECD, down from 32% in 1970. Among the things Britain does still produce rather well, oddly enough, is cars—some 1.7m of them last year at the British plants of companies including Toyota, Nissan, Honda and BMW. And there are pockets of manufacturing excellence in engineering, medical products and other sectors too.

Nonetheless, it is hard to see why the move from manufacturing to services generates such trauma. All developed countries are de-industrialising, to a greater or lesser degree. In Germany, for example, famous for its carmakers and capital-goods exporters, value added in manufacturing in 2002 was not much bigger than in Britain: just under 22% of GDP, down from 36% in 1970. Capital flows to where returns are highest, and Britain’s relative advantage these days (think of the City) seems to be mainly in services. With China, India and other developing economies poised to wipe the floor with the volume manufacturers of the developed world, Britain may be glad it was among the first to jump out of the way. One problem is that services are harder to export. But trade in services is growing.

Of course, the mass carmakers that remain are not British-owned but foreign, which really rankles. But that is what globalisation is all about, and it cuts both ways. Behind the household name Marks & Spencer there often lies a Made in Indonesia label. HSBC, Britain’s biggest bank, has more than three-quarters of its employees elsewhere. Capital is only one factor of production: why should people care more that it be British than, for example, the workforce?

In Britain, which has long welcomed foreign direct investment and for a time served as a stepping-stone for outsiders who wanted to crash the unfriendly European market, inward investment has been a particular boon. Productivity in Britain has been nothing to write home about. Multinational firms are a lot more productive than purely domestic ones, according to economists Rachel Griffith, Stephen Redding and Helen Simpson, in a working paper for the Institute for Fiscal Studies—and there is some evidence that operations owned by foreign multinationals have higher labour productivity than those owned by British multinationals, partly because they invest more. So the big foreign companies that invest in Britain help to lift productivity. Nissan’s car plant in Sunderland is seen as a model in this respect.

These trends have helped Britain to manage the transition from its industrial-revolution heritage. After the second world war, Britain sank down the GDP-per-head league tables, looking enviously at the German and Japanese economic miracles in the 1970s. That changed in the 1980s, when the state sector was shrunk, labour markets were made more flexible and other distortions removed. Britain’s economy has grown steadily since 1992, and inflation and unemployment have both been low. Though there are certainly clouds (the current-account deficit is big, house prices are cooling, consumer spending is slowing and fiscal policy may have to tighten), GDP per head is now higher in Britain than in Germany or France. Britons have no reason to hang those heads over Longbridge.

It is strange, perhaps, that British shares are not Europe’s undisputed stars. Over the longer haul, they have performed better than most. As the chart below shows, since 1993, returns on British shares have been higher than Germany’s and snuck past America’s, helped by sterling’s strong appreciation against the dollar and healthy dividends for shareholders. They have done less well over shorter periods, however. With the British stockmarket’s heavy concentration of “defensive” stocks (those that do not move with the business cycle, or not at the same time), it tends to lag “higher-beta” markets like Germany’s on the way up and lead them on the way down.

In its monthly surveys of fund managers, Merrill Lynch finds people bearish on British equities: in March, 39% were underweight in shares and only 11% were overweight; more were overweight than under in euro-area shares. There are some specific reasons. Tax and regulatory changes have made pension funds, long the mainstay of the British market, less inclined to hold shares. Last year alone, they were net sellers of £10.6 billion-worth of British stocks, buying bonds and foreign equities instead, according to figures from the WM Company, the performance-measurement arm of State Street, an American financial firm. And some expect the news out of Germany and France, uninspiring to date, to be more uplifting than Britain’s, where the business cycle is further along.

A strong economy and a strong stockmarket do not necessarily go together: at most, returns on equities may suggest future economic performance. So it may be significant that many analysts now expect London’s FTSE 100 share index, up by 2.7% so far this year in local-currency terms, to go sideways either later this year or early next year.

One straw in the wind is the annual export statistics released by the OECD last week, showing which countries had increased their share over the past year and which had not. China and South Korea swept the winners’ pot, with annual increases of 8.6% apiece, and eastern Europe was not far behind. Germany, despite its expensive currency, and America just about held their own. Britain, alas, saw its share contract by 5.3%. Better swap those Rovers for some fancy financial-market modelling at the double.

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