The UK's Mittelstand is anything but world class

EDITOR'S BLOG: As we head for the brave new world post-Brexit, the Bank of England's Andy Haldane warns that our middling businesses are lagging badly behind.

by Matthew Gwyther
Last Updated: 21 Mar 2017

‘Middling UK groups think they are better than they are.’ Not a terribly encouraging headline and made even more worrying by the fact that it comes from the bank of England’s Chief Economist, Andy Haldane.

Haldane is used to saying it as he sees it but his speech yesterday at the London School of Economics should give us pause. He made the comparison with motorists - a large majority of whom are convinced they are kings of the road when, in fact, they are fallible and only discover this when something goes seriously wrong. ‘By shining a light on companies’ relative performance,’ he said, ‘the aim is that this would serve as a catalyst for remedial action by company management.’

The facts are quite stark. Since 2008 and the Great Crash productivity growth in the UK has fallen from annual average rates of nearly 2% to zero. Wages have not grown in real terms. We have stagnated. Haldane pointed out that a third of UK companies have not seen any rise in productivity since 2000. They are zombies kept alive by interest rates at historic lows, an overheated property market and consumer spending that now shows a sign of a slowing.

Is slow growth the new normal - and if so what does that mean for innovation?

It’s hard to avoid thinking the timing of this speech is highly significant. With Article 50 about to be triggered next week, we are now ready to embark on our journey into a brave new world of international trade not tied to the apron strings of the EU. The story from the Brexiteers has been, of course, that the EU has held us back, prevented us reaching our full potential and punching at our true weight on the international stage. With one bound we will be free of its red tape and able to leap towards  becoming something far better.

What, though, if the EU has enabled us to hide our deficiencies and inefficiencies behind its protective cloak? What if, having the best of both worlds i.e. access to a vast, walled market but without the encumbrance of a joint currency, the euro, that has skewered the olive belt nations, we actually protected these middling groups who unlike the biggies such as Rolls Royce or Jaguar Land Rover never really had to compete on a tough global playing field.

The truth is that far too many SMEs in the UK never get on a plane to anywhere. When one travels around Asia one finds representatives of German and even French small businesses staying in modest hotels and trying to sell their wares. The Brits often just aren’t there. Well, they may be forced to do so now and let’s hope Liam Fox can show them how it’s done aided by a currency that is expected to sink in value still further in the coming months, thus further stoking inflation which has now risen to 2.3%.

The challenge of competing on an unprotected global stage is coping with the Brazils, Indias and Chinas, countries where people will do a day’s work for far less than in the UK and where social and environmental cost are far lower. Which takes us back to Andy Haldane and the need to do something about productivity.

This came home to me on a recent trip to Northern Ireland where the largely agricultural economy is extremely inefficient when compared with many developing countries from which it is currently protected. Take away the Common Agricultural Policy and a Northern Irish farmer’s margin of 3% looks very vulnerable indeed. Of course not every sector enjoys the same kind of subsidies, but nonetheless our mittelstand may well be soon facing some hard truths.

Image credit: Elliott Brown/Flickr


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