UK’s Shift to a Services Economy

By Andy Bruce
(Reuters)
Britain’s transition to a services-dominated economy is accelerating, reducing manufacturing’s economic output to historic lows and differentiating the nation from global peers.

Recent data indicates rapid changes in the UK’s economy, propelled by global trends and domestic factors, including Brexit and a focus on London-centric growth. Britain is now the first among the G7 nations to export more services—like finance, accountancy, legal advice, management consultancy, and advertising—than goods, with this gap significantly widening.

Manufacturing’s economic output fell to a record low of 9.2% in the second quarter of this year, down from 9.9% pre-COVID-19. While factory output remains about 20% higher than in the mid-2000s, growth in that sector has stagnated recently.

The services sector now comprises 81.2% of the economy, a rise from below 80% before the pandemic. Although the Office for National Statistics has not updated its economic composition estimates post-pandemic, an update is due at the end of the month, which will likely confirm the continued decline in manufacturing’s share.

Trade body Make UK raised concerns over the potential negative perception of British manufacturing, despite the sector’s ongoing importance in global supply chains and employment. Fast decline in manufacturing since the mid-1990s is highlighted compared to other major European economies.

Fhaheen Khan, a senior economist at Make UK, stressed the necessity for a coherent long-term industrial strategy under Prime Minister Keir Starmer’s Labour government, given the many short-lived previous attempts.

As services dominate, a regional divide is exacerbated between services-intensive London and manufacturing regions like the midlands and north of England, which Starmer aims to address. London’s share of the national economy has increased by over 3 percentage points since 2000, now at 24%, with other regions not seeing similar gains.

Trade Transformation

The transition toward services is particularly evident in trade figures.

Britain has outpaced goods exports with service exports for six consecutive quarters—the first time this has occurred in trade records dating back to the 1950s. In the second quarter, service exports hit a record £99.3 billion ($129.6 billion) while goods exports stood at only £76.9 billion, akin to late-2000s figures when adjusted for inflation.

Sophie Hale, principal economist at the Resolution Foundation, noted that while global demand for services drives the trend, the UK is also increasing its market share. Professional services have fueled the rise instead of financial service exports, which have dropped to levels not seen in two decades, in part due to Brexit.

Despite no tariffs on goods sold to the EU, exporters face challenges such as customs delays and increased paperwork, complicating trade dynamics for the manufacturing sector. Rob Wood, chief UK economist at Pantheon Macroeconomics, predicts that the services sector will continue to gain prominence in the UK economy, especially in the absence of government incentives to alter industrial dynamics.

($1 = 0.7662 pounds)
(Graphics by Sumanta Sen and Andy Bruce; Editing by Christina Fincher)