There are now widespread fears that the slowdown in the rate of growth of the UK economy might worsen and turn into another recession, Those holding this view can point to a variety of evidence to support their claim. In particular, retail sales in September were 0.4 per cent lower then a year earlier, house prices were 1.8 per cent lower than a year earlier, manufacturing output, which had grown by over 4 per cent in 1994, was only 0.6 per cent higher in September than it had been a year earlier. In addition, they can emphasise that stockbuilding cannot be expected to make the same positive contribution to output growth that it has made over the past year and is likely to make a negative contribution when excessive stocks are run down. They can also argue that any reduction in public spending relative to existing plans, to make way for reductions in taxation, will tend to reduce aggregate demand since cuts in spending have a larger effect on demand than equivalent cuts in taxation because the latter affect saving as well as spending.

Indications from the first half of the year suggested that the present cyclical expansion was starting to slow in much of the OECD. The pace of activity moderated particularly sharply in North America. Canadian GDP fell slightly in the second quarter of the year and inventory levels rose considerably. Trade growth was also lower than expected, although this partially reflected the regional impact of recent developments in Mexico. Within Europe, GDP growth slowed in the UK, France and Italy, although growth proved unexpectedly robust in a number of the smaller economies, particularly Ireland, Sweden and Finland. Output also continued to grow sharply in Australia and South East Asia.

Two institutions have retarded UK productivity growth in the post-war period: industrial relations and education. The failings of both were largely addressed in the 1980s. The productivity improvement of the 1980s was genuine and was largely due to the reduction in union power brought about by the trade union legislation of the 1980s. The 1980s and 1990s have also seen large falls in the proportion of the labour force which is unqualified and rises in enrolment rates in further and higher education, changes which tend to increase long-run growth. But two factors have obscured the extent o f the improvement. First, the whole climate for economic growth is less favourable than it was in the so-called Golden Age prior to the first oil shock in 1973. Second, UK macroeconomic policy compares poorly with other OECD countries: booms have been shorter and recessions longer, so that microeconomic success has been masked by macroeconomic failure.

This paper is developed from the presentation given by Walter Eltis at the National Institute's seminar ‘Industrial Productivity and Competitiveness' held in London on 23 May 1995. It sets out the approach underlying the UK Government's 1994 and 1995 White Papers on competitiveness and begins by reviewing the debate on the meaning of national competitiveness. The White Papers define competitiveness as the ability to raise living standards and argue that, contrary to the views of some leading economists, competitiveness is a useful guide to policy because of the emphasis on national benchmarking. It then explains that the analytical basis of the Government's approach—which identifies ten key influences on competitiveness—lies in the theoretical and empirical analysis of economic growth (including ‘new’ growth theory) and on detailed studies of the sources of productivity differences across countries. Finally, it considers the role of privatisation, inward investment, the growth of small firms and labour market policies in improving UK performance. The paper concludes that, although three quarters of the productivity gap with French and Germany industry appears to have been closed since 1979, productivity in both manufacturing and services still lags behind those in the leading West European countries.

This article presents measures o f competitiveness in manufacturing comparing Britain to Germany, France and the United States. Data from the National Accounts and the Census of Production are combined to derive new estimates of relative unit labour costs for a number of manufacturing industries. The results show that British manufacturing had a competitive advantage over Germany and France in 1993. This arose primarily from the devaluation of Sterling and followed a period, from 1989 to 1992, when unit labour costs in British manufacturing were generally close to those in Germany and France. Unit labour costs in American manufacturing, however, were considerably lower than in the European countries in 1993. The results by industry show that Britain performs relatively poorly in much of the engineering sector while being relatively more competitive in consumer goods industries. Over time changes in the market exchange rates and nominal wage inflation have large impacts on the relative competitive position of total manufacturing in the four countries whereas productivity growth plays a minor role. However, at the industry level productivity growth is important. In the face of similar movements in relative nominal wages across industries, differences in productivity performance distinguish those British industries which gained ground over their rivals abroad from those whose competitive position worsened.