Sept 11 (Askume) – Britain is moving increasingly towards a services-based economy, reducing the share of manufacturing in economic output to a historic low and leaving the country isolated from its global peers.
The latest data show the composition of the world’s sixth-largest economy is changing rapidly, driven by global trends as well as domestic factors such as Brexit and London-centric growth.
For the first time among the G7’s large advanced economies, Britain’s exports of services – which include finance, accounting, legal advice, management consultancy and advertising – now exceed exports of goods. Moreover, the gap is growing rapidly.
Meanwhile, the share of manufacturing in UK economic output fell to a record low of 9.2% in the second quarter of this year, according to official data calculated by Askume based on national accounts data.
Although factory output is roughly a fifth higher than in the mid-2000s, expansion has stalled in recent years.
Instead, the services sector has driven Britain’s sluggish economic growth in recent years.
It currently accounts for 81.2% of the UK’s economic output, compared with just under 80% before the pandemic.
The Office for National Statistics has not updated its estimate of each industry’s share of the economy since the pandemic wreaked havoc on the national accounts, but plans to do so later this month.
The latest data, released on September 30, is likely to confirm the decline in the share of manufacturing in the economy.
Trade body Make UK said it could create an image problem for British industry, although British manufacturers would remain a vital part of global supply chains, as well as a major source of employment and a destination for international investment.
“We care about how the rest of the world views British manufacturing,” said Faheen Khan, senior economist at manufacturing group Make UK.
Since the mid-1990s, the manufacturing share of the UK economy has fallen faster than that of any other major European economy.
Khan said Prime Minister Keir Starmer’s new Labour government should implement a coherent and long-term industrial strategy, something Britain has lacked in recent decades although various attempts have proved short-lived.
Producers will keep an eye on the budget on October 30 for more details.
The dominance of services helps explain the worsening regional divide between services powerhouse London and manufacturing-heavy areas such as the Midlands and Northern England – a gap Starmer has promised to close.
London’s share of the national economy has increased by more than 3 percentage points to 24% since 2000, while the rest of the UK’s share has not increased during the same period.
Business Change
The shift towards services is particularly evident in trade data.
UK services exports have exceeded goods exports for six consecutive quarters – something that has not happened in trade statistics since the 1950s.
UK services exports reached a record 99.3 billion pounds ($129.6 billion) in the second quarter. But its merchandise exports were just 76.9 billion pounds, similar to the inflation-adjusted level of the late 2000s.
“Global demand for services is driving this, but the UK is also increasing its market share,” said Sophie Hale, chief economist at the Resolution Foundation think tank.
It is professional services such as accounting, outsourcing and law firms that are driving this growth, rather than financial services exports.
Although Britain will no longer face tariffs when selling goods to the EU, business groups and survey evidence suggest that customs delays, more form filling and other non-tariff trade barriers are still making it difficult for exporters of goods.
“Most estimates point to an impact on UK trade, which is particularly important for manufacturing,” said Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics.
He said he expected the services sector to play a more dominant role in Britain’s economy.
“The government can make decisions that change the structure of the industry – you can change education, you can change infrastructure, you can create investment incentives,” Wood said. “But nothing is going to change in the near future, so (the changes) are likely to continue.”
($1 = 0.7662 British pounds)
