This year will see a small step to recovery

THE UK, a once-proud global manufacturing powerhouse responsible for engineering marvels such as the Jaguar EType, Concorde and the Flying Scotsman, doesn’t make anything any more.

This view continues to gain momentum as we move towards what is likely to be another challenging economic year. Still bearing the scars of the global economic downturn, the UK economy is still a long way away from recovery and our politicians appear to be running out of ideas.

But the idea that our economy is ailing because the fact that ‘we don’t make stuff any more’ is, in our opinion, inaccurate and should it lead to misdirected government policy could damaging.

At the heart of this perspective is the notion that only material things have value.

However, such thinking fails to appreciate the complex stream of work involved in the production of many items, and the stages at which relative value is created.

In a globalised world in which goods and services are generally free to flow across international boundaries it makes sense for each economy to focus on the part of the production chain where it can add the most value, in the jargon, where it enjoys ‘relative comparative advantage’.

Such decisions are normally the product of a nation’s particular qualities, itself often a consequence of contrasting stages of economic development.

As an economy with on a relative global scale – a more expensive workforce, the UK is better placed to handle some more complex tasks, be it the extensive accounting required in the management of multi-billion pound enterprises, or the design and blueprints of a new microprocessor.

In 2013 we envisage the UK returning to growth, and the acceleration will be pronounced by comparison to other large economies. The UK private sector is currently running a healthy financial surplus: its savings exceed its investments. According to the IMF, the ongoing and prospective reduction in the UK’s structural budget deficit is larger than that seen in the Eurozone and in the US. Nonetheless, the UK economy may see a bigger improvement in GDP growth in 2013 than any other large economy. Worries about consumer balance sheets look overdone to us: the net worth of the UK household sector remains strongly positive, and the UK’s net overseas borrowings are small by comparison.

Meanwhile, almost unnoticed, the UK’s population has been growing steadily, largely fuelled by inward migration, which should at the very least underpin the UK’s structural growth rate.