1: Structure and performance of the UK economy

UK productivity rebounded quickly after the COVID-19 pandemic.

• Among the five economies examined, the UK experienced the most pronounced decline in labour productivity (-9.2%) in 2020. France followed with a decline of 7.3%, while Germany experienced a decline of 3.3%.
• However, in 2021 the UK displayed the fastest growth rate (8.8%), closing the gap on pre-pandemic levels. Switzerland followed with a growth rate of 5%, and Germany with 3.3%.

Knowledge-intensive services and manufacturing have led the COVID-19 recovery.

• Between 2019 and 2021, knowledge-intensive services and manufacturing saw some of the fastest productivity growth among the economies analysed. In the UK, for instance, labour productivity in manufacturing increased by 9.7%, while in information and communication it rose by 12.2%.
• This positive trajectory persisted to some degree in 2022. For example, Switzerland stands out for the rapid growth of its manufacturing industry, largely driven by its chemical and pharmaceutical industries. In contrast, the UK experienced a setback, with a decline of -3.3% in manufacturing value added in 2022.

Knowledge-intensive services are expanding their contribution to the economy.

• Between 2019 and 2021, knowledge-intensive services, such as information and communication and professional, scientific and technical activities, significantly increased their contributions to the economies analysed.
• In the UK, these sectors together accounted for an increase of 0.4 percentage points in employment shares and 1.8 percentage points in value added shares. Although their growth moderated in 2022, rapid expansions are expected to continue in the future.

2: Investment in innovation

The UK is considered to be a leading global hub for scientific knowledge.

• The UK produces more academic publications than any other country, except China and the US, but 57% more than the US and six times more than China in per capita terms.
• The UK is the world leader in field-weighted citation impact (FWCI), a common benchmark for research quality.

However, the UK falls behind in converting scientific knowledge into commercial success.

• Compared to the US, the UK lags behind in development and scale-up metrics.
• The proportion of the workforce employed in medium and high value added manufacturing is lower than in competitor nations, and the value added per worker in these sectors is less than half of that in the US.

The UK’s spending on R&D is higher than the average of the OECD countries, but it is still below that of leading nations.

• The UK’s gross domestic expenditure on research and development (GERD) as a share of GDP was 2.91% in 2021, above the OECD average of 2.72%. However, the UK still lags behind countries such as Korea, the US, Japan and Germany.
• In 2021, UK government-funded R&D amounted to 0.57% of GDP, below the OECD average of 0.63%.

Among the top 100 R&D-investing companies in the world, only three have headquarters in the UK.

• This is quite low, considering that in 2022 the UK was home to a total of 95 of the world’s top 2,500 R&D-investing companies.
• The UK ranks fifth behind the US, which has 827; China, which has 679; Japan, which has 229; and Germany, which has 113 such companies.

3a: Machinery and equipment manufacturing sector

Key Trends

The UK machinery and equipment (M&E) sector is a major global player, but some sub-sectors have contracted significantly.

• According to OECD data, the UK ranked among the top players in the world by value added in 2021, behind Japan, the US, Germany and Italy but ahead of the Netherlands, France and Switzerland.
• Between 2008 and 2021, value added in some M&E sub-sectors experienced substantial expansion, with other general-purpose machinery and lifting and handling equipment growing by 41% and 36%, respectively. Conversely, some sub-sectors have experienced a significant contraction, particularly other engines and machinery for plastic and rubber, which declined by 50% and 90%, respectively.
• Overall, value added in the M&E sector contracted from £13.1 billion in 2008 to £12.5 billion in 2021. However, the productivity of the M&E sector remains 37% higher than the average productivity of the whole manufacturing sector and 60% higher than the whole economy.

A decline in employment across 17 out of 21 UK M&E sub-sectors resulted in a loss of 28,000 jobs between 2011 and 2021.

• The UK M&E sector ranked sixth in terms of employment among OECD countries in 2021, employing 162,000 people.
• This represents a loss of 28,000 jobs compared to 2011, amounting to a 15% reduction over the course of 10 years.
• Among M&E sub-sectors, the most significant job losses between 2011 and 2021 were reported in machinery for mining, quarrying and construction
  (-5,300), machinery for plastics and rubber (-4,000), office machinery (-3,200) and pumps and compressors (-3,200).

While the UK is the 10th largest M&E exporter in the world, the country has one of the largest trade deficits.

• The UK’s trade deficit in the M&E sector more than tripled between 2011 and 2022, ranking 176th out of 188 countries in trade balance.
• The largest UK M&E sub-sectors by trade value in 2022 were other engines and machinery for mining, quarrying and construction.
• China, the largest M&E exporter, has been gradually gaining market share at the expense of other competitor countries.

Growth of business expenditure on R&D (BERD) in the UK M&E sector has been slower than in the manufacturing sector as a whole.

• Business expenditure on R&D (BERD) in the M&E sector represented 5.9% of total BERD in the UK manufacturing sector in 2022.
• BERD in the UK M&E sector rose from £0.7 billion in 2000 to £1 billion in 2020, with a compound annual growth rate (CAGR) of 1.9%.
• This is lower than the compound annual growth rate observed for overall UK manufacturing (2.9%) during the same period.

3b: Machinery and equipment manufacturing sector

Key Drivers

• The M&E market depends on demand from other sectors and is typically sensitive to economic cycles. The UK M&E sector aggregates many sub-sectors, which are quite distinct from each other and which respond differently to economic cycles. Sales orders in the M&E sector are usually tied to the long-term investment plans of other sectors. In periods of economic uncertainty, these plans are often postponed.
• High production costs, political uncertainty and foreign ownership are among the factors influencing offshoring decisions in some sub-sectors. Reasons for offshoring appear to be the loss of key suppliers and high production costs in the UK. For example, the fluid power equipment and the valves and actuators sub-sectors are affected by the high cost and low availability of steel in the UK. As a result, many products are designed in the UK but manufactured in China. The UK’s exit from the EU has contributed to the consolidation in Europe of manufacturing in the pumps and compressors sub-sector, which is dominated by European firms.
• Changes in regulations, intra-industry trade and policy changes in export markets may have impacted UK imports and exports. New trade rules with the EU have impacted the ability of SMEs to export to Europe. The decision to move away from the European CE conformity assessment marking, and to create a UK-specific UKCA marking, followed by a reversal of this decision, has also affected some sub-sectors. New regulations require certain valves to be tested within China by a local inspector, adding costs to qualify for the Chinese market.
• Labour shortages have impacted growth and incentivised automation across sub-sectors. The consulted firms reported difficulties hiring younger and more diverse workers for the sector. These difficulties cut across sub-sectors and functions, affecting both engineering and technician positions. New skills are also needed, for example, cyber-security, robotics, IoT, advanced manufacturing, cloud and big data. Investments in automation and factory optimisation have been occurring in the sector and partly explain the reduction in employment.
• R&D investment decisions in the UK M&E sector are often made abroad. There is a dominant presence of foreign-owned original equipment manufacturers (OEMs) and distributors across UK M&E sub-sectors. The consulted stakeholders perceive UK M&E companies to be less R&D-intensive than foreign ones, except for some large internationally competitive firms. The UK M&E sector is dominated by SMEs, which might have fewer resources available for R&D and fewer advisory and support options from the broader innovation ecosystem than large firms.
• Sustainability, digitalisation and materials research trends have shaped the direction of innovation efforts in recent years. Emissions regulations, such as those for non-road mobile machinery, and net-zero targets make it imperative to develop more energy-efficient and environmentally sustainable machines and equipment.

4: Science and engineering workforce

The UK has a relatively high proportion of science, technology, engineering and mathematics (STEM) graduates.

• During the academic year 2021/22, 42% of all graduates in the UK completed STEM disciplines.
• The UK produces more STEM graduates per capita in the 20–34-year-old population than comparator countries. In 2020 the UK awarded 1,393 first university degrees per 100,000 individuals in STEM fields, compared to 1,317 in the US, and 690 and 650 in India and China, respectively.

However, the UK is producing fewer graduates in engineering, manufacturing and construction.

• In 2022 more than half (52%) of the UK’s STEM graduates pursued health-related disciplines.
• In 2021 the percentage of graduates in engineering, manufacturing and construction in the UK was only 9.1%, which is significantly lower than Italy, Switzerland, Japan, Korea and Germany. In these countries, the percentage of graduates in these disciplines ranged from 14.4% to 22.1%.

Despite the high proportion of STEM graduates, there are significant STEM-related skills gaps in the UK labour market.

• In the UK 934,000 vacancies were recorded towards the end of 2023, 46% of which were in fields related to STEM disciplines. At the beginning of 2024, 12% of UK firms in manufacturing and 6.9% in information and communication said they were experiencing a shortage of workers.
• For UK employers, it is difficult to find individuals with skills related to medical knowledge, scientific knowledge, production and technology knowledge and digital skills compared to the OECD average and the EU.

5: Net zero innovation

The UK has successfully decoupled GDP growth from greenhouse-gas (GHG) emissions.

• While the UK’s GDP doubled between 1990 and 2021, the country achieved a 40% reduction in GHG emissions during this period. However, further work is required to achieve the target set by the Climate Change Act, which commits the UK government to reducing GHG emissions by at least 100% of the 1990 levels (net zero) by 2050.
• Only five industries failed to reduce emissions from 1990 to 2021: wholesale and retail trade and repair of motor vehicles; construction; accommodation and food services; administrative and support service activities; and real estate activities.

The UK low-carbon and renewable energy economy (LCREE) has performed strongly since 2019.

• The LCREE economy reported a £54.4 billion turnover in 2021, compared to £45.8 billion in 2019, and over 27,000 and 42,000 more businesses and employees, respectively, in 2021 than in 2019.
• The sectors with the highest turnover in 2021 were: energy-efficient products (£14.01 billion); low-emission vehicles and infrastructure (£8.52 billion); and offshore wind (£8.42 billion).

The UK consistently ranked among the top six countries in public R&D expenditure on low-carbon renewable energy technologies from 2010 to 2022.

• At $1.6 billion, the UK’s public R&D budget in low-carbon and renewable energy technologies in 2022 was lower than Germany ($2 billion), Japan ($3.4 billion), France ($4.9 billion) and the US ($9.6 billion) but higher than Canada ($1.2 billion).
• Among low-carbon technologies, the highest public R&D expenditure in the UK in 2022 was on nuclear power technologies, followed by energy efficiency and renewables.