By Andy Bruce
(Reuters) – Britain’s transition to a services-dominated economy is accelerating, reducing manufacturing’s share of economic output to a historic low and setting the country apart from its global peers.
Recent data shows that the composition of the world’s sixth-largest economy is changing rapidly, driven by global trends but also domestic factors such as Brexit and increasingly London-centric growth.
Britain now exports more services than goods, including finance, accountancy, legal advice, management consultancy and advertising, a first among the Group of Seven major advanced economies. Moreover, the gap is widening rapidly.
Meanwhile, manufacturing’s share of Britain’s economic output fell to a record low of 9.2 percent in the second quarter of this year, according to official data, compared with 9.9 percent before the COVID-19 pandemic, according to Reuters estimates based on national accounts data.
While factory output itself is about a fifth higher than it was in the mid-2000s, that expansion has stalled in recent years.
Instead, the services sector has fueled Britain’s sluggish economic growth in recent years.
This represents 81.2% of British economic output, down from 80% before the pandemic.
The Office for National Statistics has not updated its estimates of each industry’s share of the economy since the pandemic disrupted national accounts, but an update is scheduled for later in the month.
An update on September 30 appears to confirm that manufacturing’s share of the economy is declining.
Trade body Make UK said it could create an image problem for British industry, although British manufacturers would remain an important part of global supply chains, as well as a major source of employment and a destination for international investment.
“Where we are concerned … is more about how manufacturing in the UK is perceived for the rest of the world,” said Fhaheen Khan, chief economist at manufacturing association Make UK.
Since the mid-1990s, manufacturing as a share of the economy in Britain has declined more rapidly than in other major European economies.
Khan said it was vital that Prime Minister Keir Starmer’s new Labor government implements a coherent and long-term industrial strategy, which, despite various attempts, the UK has lacked in recent decades and all of which have proved short-lived.
Producers will review the budget by October 30 for more details.
The rise of the services sector helps explain the worsening regional divide between service hub London and industrial-heavy parts of the country, such as the midlands and the north of England – gaps that Starmer has promised to close.
London’s share of the national economy has risen by more than 3 percentage points to 24% since 2000, with no other region in Britain increasing its share over the same period.
TRADE HAS BEEN RETURNED
The shift towards services is particularly marked in trade data.
Britain has exported more services than goods for six consecutive quarters – a record never seen before in trade data dating back to the 1950s.
Britain exported a record 99.3 billion pounds ($129.6 billion) of services in the second quarter. But it exported just £76.9bn of goods – similar to levels seen in the late 2000s when adjusted for inflation.
“Global demand for services is driving a lot, but the UK is also increasing its market share,” said Sophie Hale, chief economist at the Resolution Foundation think tank.
Professional services such as accountancy, outsourcing and law firms provided more growth than financial services exports, which in real terms have fallen to levels seen around 20 years ago – possibly as a result of Brexit.
While Britain does not face tariffs when selling goods to the EU, evidence from business groups and a survey suggests that goods exporters still find trade difficult due to customs delays, more form filling and other non-tariff barriers.
“Most estimates suggest that this is a squeeze on UK trade, which is particularly important for manufacturing,” said Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics.
He said that he expects the service sector to dominate the British economy even more.
“Governments can make decisions that will change the industrial complex — you can change education, you can change infrastructure, you can create incentives for investment,” Wood said. “But there’s nothing on the horizon, so (the state) will continue.”
($1 = £0.7662)
(Graphics by Sumanta Sen and Andy Bruce; Editing by Christina Fincher)
