The services industries, once again, have come to the rescue of the British economy. In the first quarter of this year, output fell in manufacturing, construction, agriculture and from the North Sea oil and gas fields. But these falls in production were more than offset by higher services output.
Source: The Telegraph, 2016
All the main services sector activities expanded in the first three months of this year – retailing, restaurants, transport and communications, business and financial services and government services. Because services make up nearly 80pc of the output of our economy, this was sufficient to outweigh declines in other sectors and produce a 0.4pc rise in GDP – as was predicted in last week’s column.
This is part of a consistent pattern which we have seen over this recovery. The services industries have been punching above their weight – generating around 90pc of the additional economic output and jobs in the UK since 2009.
George Osborne may have talked about the “march of the makers”, but instead we have seen the “surge of the servers” when it comes to generating economic growth.
This makes many people uneasy. In the 1960s, about 35pc of workers were employed in manufacturing. Now the figure is less than 8pc.
“We don’t make anything any more” is a frequently heard complaint.
It is true that the UK economy is less dependent on manufacturing than it was in the past. But we are still the seventh largest producer of manufacturing goods in the world, according to the Engineering Employers Federation.
Only the US, China, Japan, Germany, South Korea and (surprisingly) Italy produce a larger value of manufactured goods than the British economy.
The trend toward being a more service-oriented economy has been a common theme across the Western world since the 1970s. In the United States, the share of services in GDP is over 80pc, higher than the UK. In France it is around 79pc, similar to ourselves, and in Italy and Spain the figure is around 75pc. Of the major western economies, Germany is the least service-oriented, with the services sector making up around 70pc of the economy.
Though the figures vary, in every major economy around the world, the services industries are responsible for generating the majority of GDP. Even in China, services now account for over 50pc of the economy’s output.
So how does a services-driven economy generate economic growth? When we think of services industries, a number of caricatures spring to mind. One is retailing. Napoleon famously described Britain in the early 19th century as “a nation of shopkeepers”. The retail sector is an important component of our economy – but it generates less than 6pc of total GDP. Another very visible aspect of the services sector is hotels and catering – including pubs and restaurants. In the 1980s, the word “McJob” appeared in the dictionary to describe jobs in the fast-food industry. Yet the contribution of pubs, hotels and restaurants to UK GDP is less than 3pc of our total economic output.
Another caricature of the services sector is financial services, which has been in the spotlight because of the banking crisis. However, banking, insurance and other financial activities contribute less than 8pc of the total GDP of the UK economy and less than 3pc of the jobs total.
There is much more to the services side of our economy than retailing, restaurants and financial services. The services industries here in the UK and in other major economies include a very diverse range of economic activities. I find it helpful to think of them in three main categories – each of which contributes about a third to the total.
First, there is a range of services which are mainly supported by government: health, education, social care, the police.
Second, there are services which support our local economies by enabling us to get to work and carry out our daily lives, such as shops, hotels, restaurants, transport and communications.
Third, the UK has a strong position in a range of business and financial services.
Some of these services are provided directly to consumers (eg banking, insurance, estate agency). But the bulk of these services are supplied to small and large businesses – providing back-office support (eg data centres and call centres) and professional advice.
One of the key strengths of the UK economy is that we sell a lot of business and financial services overseas and as a result they help our balance of payments. My employer PwC works for a wide range of overseas business clients and is therefore a contributor to this export success story.
Total UK exports of services last year totalled £226bn, around £8,400 per UK household, and only just behind the value of our manufactured exports – £229bn. The UK is the second-biggest exporter of services in the world behind the United States.
As well as supporting the balance of payments, services industries contribute to the growth of the British economy in two ways. They generate jobs – and here the record is very impressive. Out of nearly 2.5m new jobs created since the end of 2009, over 2.2m have been created in services.
The other engine of growth is productivity, and here there is a bigger challenge. Many service activities have limited scope for productivity growth, because the delivery of the service is very closely linked to an individual – for example, hairdressing, health, social care and schools. In other areas, however, there is more potential for higher productivity. Information technology and mobile phones have opened up many new possibilities and business opportunities, and these activities are themselves part of the services sector. As many activities – like retail shopping – move online, this opens up a lot of potential for productivity improvement.
Technology has been a powerful driver of growth in manufacturing through the development of new and better products as well as more efficient production methods. We now need to harness technology to become a major driver of productivity growth in the services sector.
In the past, we looked to manufacturing industry to be the main engine of economic growth – through job creation, higher productivity and export success. In all three areas, the services sector is now taking over. For those of us who grew up in a world dominated by manufacturing industry before the 1970s, this may feel uncomfortable. But it is the new reality for the UK economy.
Source: The Telegraph, 2016