A Union flag, and a European Union (EU) flag fly as protesters march during a Unite for Europe march to protest Brexit in central London, U.K. (Photographer: Luke MacGregor/Bloomberg)

Brexit or Not, Britain’s Real Economic Threat Is Here to Stay

(Bloomberg) -- In the relentless political drama of Brexit, the closure of a small ball-bearing factory 95 miles (152 kilometers) west of London barely registered outside the local community.

The loss of the Stonehouse plant will cost 185 jobs, hardly the thousands some companies say are under threat because of the upheaval from leaving the European Union. Nor did the December announcement come with the kind of political noise surrounding Japanese carmaker Nissan Motor Co.’s recent decision to scrap plans to build a model in the U.K.

By ending manufacturing at the site in 2021, though, Swedish owner SKF AB highlighted a dangerous undercurrent in the British economy that exists regardless of what happens with the divorce from the EU: the country’s productivity. And uncertainty about Brexit has made companies cautious about investing in the automation that might help boost it.

The problem has been on the radar of politicians, executives and central bank policy makers for a while, but it’s now becoming more urgent. Businesses are looking to a future outside the common European market as Prime Minister Theresa May tries to get her Brexit deal through Parliament and they face a stark choice: modernize or die.

It’s not that the country isn’t working hard enough, more that it’s not working smart enough. On average, French workers toiled for 10 percent fewer hours in 2017, yet they produced more while they did so.

Brexit or Not, Britain’s Real Economic Threat Is Here to Stay

That’s aggravating an already dismal standing among peers. Indeed, SKF said it’s shuttering Stonehouse and moving production to sites in Italy and France, where the company can “make better use of more modern machines and manufacturing technologies.”

Data compiled by the International Federation of Robotics, an industry group that champions the deployment of automation equipment for manufacturing, shows the U.K. is falling behind.

By one measure, robot density –- the number of automated machines per 10,000 employees -- the country ranks 22 in the world, bang in line with the average. Germany is third, underscoring the scale of the challenge facing the ambitions of Brexit supporters to boost the U.K.’s global standing.

The damage caused by that shortfall can be seen in the U.K.’s productivity record, said Ram Ramamoorthy, a researcher and doctorate supervisor at the Edinburgh Centre for Robotics.

“If the U.K. wants to be competitive with peers that are investing in modern technology, then we have to do that too,” he said. “We’re not at a point of no return, but it would take a sustained effort to turn things around and that won’t happen overnight.”

Brexit or Not, Britain’s Real Economic Threat Is Here to Stay

Britain is home to some of the weakest growth in output per hour worked among Group of Seven nations. Between 2010 and 2015, it near flat-lined at 0.2 percent a year, far below its long-term average of 2.4 percent from 1970 to 2007 and lagging that of France and Germany. That’s particularly troubling because consulting firm McKinsey estimates about 90 percent of future economic growth will need to come from improvements in productivity just to keep pace with historical growth rates.

“Some damage to the economy can’t be undone even if Britain does stay in the EU. The difference between our pre-referendum potential GDP forecast and how we think trend GDP has evolved since the vote…is 1.4%. We think Brexit can explain about a third of that with the remainder reflecting the U.K.’s persistent (and persistently surprising) productivity weakness.”

--Dan Hanson, Bloomberg Economics. Read the U.K. INSIGHT.

In part, it’s down to Britain’s more flexible labor market. Following the global financial crisis, U.K. companies went on a hiring spree fueled by easy access to millions of cheap workers primarily from the EU’s poorer eastern members such as Poland.

Not only did that create an investment-weak recovery, with spending falling in areas like equipment, but one that could prove unsustainable should May’s government ultimately succeed in its Brexit goal of curbing the freedom of workers to settle in the U.K.

The pro-Brexit argument suggests productivity might benefit because companies will no longer be able to rely on cheap labor and be forced to invest in robots and smarter working.

“Productivity is arguably still the number one issue for the U.K. over the medium term,” said Dean Turner, economist at UBS Wealth Management. “That’s where the focus of government and industrial policy really needs to be if the U.K. is to offset some of the possible negative impacts of leaving the EU.”

Brexit or Not, Britain’s Real Economic Threat Is Here to Stay

People aren’t the only thing the economy stands at risk of cutting off. Foreign-owned businesses have, on average, productivity that is double that of domestically-oriented firms. That underscores the importance of openness to trade and overseas investment, according to the Bank of England’s chief economist, Andy Haldane.

The Bank of England has slashed its forecasts for business investment to zero for 2018. Haldane has likened the situation to companies simply pressing the “pause button.”

Overall, a report Tuesday indicated the U.K. economy is at risk of stalling after growth in the services sector came close to a standstill, with firms growing increasingly anxious about Brexit. The purchasing managers index for services dropped to a 2 1/2-year low in January, IHS Markit said in a survey, falling more sharply than economists had forecast. 

A new start in innovation might be just the impetus firms and the government need, according to Benjamin Craig, who specializes in the tax related to research and development at international business performance consultancy Ayming.

“We are lagging far behind our main competitors France and Germany, a dangerous position to be in ahead of Brexit if we want to remain a competitive economy,” he said. “However, following Brexit, it’s possible that we could see a shake-up in the R&D space as we gain more independence over measures.”

Brexit or Not, Britain’s Real Economic Threat Is Here to Stay

Whatever happens, it looks too late for Stonehouse. In the 1930s and then World War II, the factory’s making was its location out of range of Luftwaffe bombers yet on transport routes. Now, its major client, Rolls Royce, is phasing out its use of Stonehouse’s ball bearings in favor of others made in SKF’s more modern and flexible Italian and French plants.

SKF’s strategy is to consolidate its 80 or so global production sites and Brexit wasn’t to blame, said spokesman Theo Kjellberg. The company opened a fully-automated production line in Valenciennes, France, on Jan. 21 to make components for airplane engine maker Safran. 

Employees at the Stonehouse plant long feared they weren’t a priority, according to Nick Bailey, regional officer of the Unite labor union.

“They say lots of the tooling and machinery is quite old,” he said. “Without investment, how can you attract new work?” During talks with staff about the plan to close the site, SKF executives said the workload will decline by 40 percent, according to Bailey. “It’s like being left to wilt on the vine.”

©2019 Bloomberg L.P.