Ignore the doomsayers, our economy isn’t going to hell in a handcart

One common myth can be summarized as follows: the UK economy is a one trick pony, dominated by financial services in the City of London, and we won’t be able to halt our relative decline until we start making things again.

The data show that almost every aspect of this myth is wrong, including – perhaps most importantly – the policy conclusion. Let us leave aside the fact that the financial services sector employs millions of people all around the country. It turns out that the UK’s mix of international strengths is not so narrow compared to other countries. And in fact it is well focused on many fast growing global markets.

What is true is that the UK is a powerhouse of global services exports, exporting $ 418 billion worth in 2019, second only to the US. The services share of our exports – 45 per cent – is high by international standards, but many other countries such as France, Spain and the US also specialize in services. It’s not just financial services either. Strengths such as business services (like legal and consulting), personal, cultural and recreational services, including education, make up a much bigger share.

The UK also has important relative strengths in big manufacturing sectors including aircraft, pharmaceuticals and beverages.

And by the standards of similar countries our specialisms are not just concentrated in a few sectors. We are slightly more specialized than France or Germany, but less so than Japan, and much less so than smaller, richer, countries like Switzerland and Ireland.

It’s also not true that countries with higher productivity tend to be more specialized in manufacturing. France, the US and Singapore all specialize in services. They still have higher GDP per capita than we do, so our focus on services isn’t holding us back. What’s more, in the decade to 2019, UK exports grew by an average 3.3 per cent per year, faster than Germany but slower than the US. None of that UK-US gap was because of the kinds of sectors we tend to focus on.

Implications for policy and the future jump straight out of the data. One very persistent pattern is that countries’ specialisms very rarely change much over time. For example the UK’s strength in services was present in 1980, before the rapid deindustrialisation that followed. The lesson for policy makers is to build on your strengths. As the Resolution Foundation point out, for the UK these include a highly educated and innovative workforce, international openness to talent and ideas, a flexible economy and global excellence in cutting edge research.

It’s important to note that the focus of this analysis on service sectors that trade internationally means the implications for policy aren’t the whole story. We ultimately care about higher living standards for the whole population. This requires high-quality, well-paid jobs in their millions across the economy. The sectors that employ the most people in a modern economy increasingly tend to be what economists call non-tradeable services. Think logistics, distribution, warehouses, retail, hospitality, care and construction. You won’t often find these sectors at the center of a government’s industrial strategy, but addressing weaknesses in them is now where a lot of the action is if we want to raise productivity and living standards.

They are also the sectors where it has traditionally been hardest to raise productivity through the use of new technologies. The process of cutting hair, serving a meal or caring for someone is largely the same as it was a hundred years ago. In some sectors that may finally be changing thanks to innovations like the use of remote tech in care, advanced logistics, automated checkouts and prefabricated building materials, but in many of these areas the UK is lagging behind other countries.

The bottom line then, is that there are some good reasons to be optimistic about the UK’s economic future, but if we want a higher productivity economy that benefits everyone we also need to focus on some home grown weaknesses.


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