UK 'catching up with Europe'

LUCY ROBERTS

Britain's manufacturers have narrowed significantly the productivity gap with their German and French rivals in the past three years, according to a report out today.

The UK's engineering sector, which for a number of years, has lagged behind international competitors, has transformed itself into a star performer. It is now enjoying extraordinary growth rates and a surge in exports, according to the independent report from Walter Eltis of Oxford University. Mr Eltis was chief economic adviser to Michael Heseltine when he was President of the Board of Trade.

His findings, published by the Foundation for Manufacturing and Industry - the non-political business think-tank - reveal that manufacturing productivity in the UK has increased by more than 4 per cent a year since 1992. Mr Eltis' report describes the 20 per cent surge in engineering exports last year as "a startling performance in achieving an exceptional rate of growth in what used to be one of the weaker sectors of UK industry".

This increase in manufacturing efficiency has already closed three quarters of the competitiveness gap between the UK and France and Germany. French and German productivity is now 10 per cent above that of the UK, while Japan's advantage over the UK has shrunk from 33 per cent in 1979 to 31 per cent in 1993.

The devaluation of sterling since September 1992 has benefited manufacturing performance, not least because this time the gains have so far not been wiped out by fast-rising inflation. But this latest in a series of devaluations over the past 30 years is not the main reason why UK manufacturers are doing so much better than in the 70s and 80s.

The explanation can be found elsewhere. Japanese, German, American and other foreign firms that have set up plants in the UK now account for a quarter of UK manufacturing output. "Their productivity levels are far above the UK average," the report states. "They have introduced techniques of quality control and a managerial 'style' which has spread widely to British-owned companies."

Government policies to assist the growth of smaller firms, combined with a more flexible labour market, have also helped to boost manufacturing productivity. In 1979 the total number of businesses in the UK was 1,890,000, and peaked to 3,090,000 in 1989. However by 1993 the number had fallen to 2,810,000 - giving a net growth of 920,000 businesses between 1979 and 1993.

Lower taxes and deregulation have helped to increase staff ing levels - with up to 10 per cent more people being employed in manufacturing sector than in 1979. In total the sector now accounts for up to 30 per cent of all manufacturing employment.

The level of total manufacturing output is just 1 per cent higher in 1995 than five years ago and 11 per cent higher than in 1979, showing that productivity may have grown but output has not kept pace. According to the report, several more years of surging exports, which will ensure a tighter clamp on inflation, will help to change this.

If the manufacturing gap can be closed further over the next decade, by the 21st century the next arena for international competition is likely to be the private service sector. At present, comparative performance in this sector still leaves much to be desired.

Private sector employ- ment has increased in the UK, but has fallen in the European Union as a whole, the report claims.