Super services Sector is the future

GDP figures for the UK economy released this week showed a familiar picture. Growth remains heavily dependent on services, which make up around 80pc of output and employment. Most of this growth is coming from the private sector. Tight controls on public spending are holding back the growth of services such as education and health.

By contrast, the manufacturing industries continue to struggle – experiencing a very up-and-down recovery. 2010 and 2011 were years of growth, but this was followed by a setback in 2012 and 2013 as the euro crisis took its toll.

Production was up in 2014 but fell back again last year. Across the recovery as a whole, manufacturing output has grown by just 1pc per annum, half the average of 2pc across the whole economy. The main private sector services activities have been growing at around 3pc a year.

This is not a new trend. The growth of manufacturing production in the UK has been sluggish since the 1970s. Between 1950 and 1970, output grew by 3pc a year. Between 1970 and 1990 it slowed to less than 1pc per annum. And since 1990 we have seen virtually no growth in manufacturing output.

For the cradle of the Industrial Revolution, this looks like a sign of economic failure. But the trends we have seen here in the UK have been replicated across the West. The US and other European economies are also heavily reliant on services, which make up 70pc-80pc of economic activity and jobs in most advanced economies.

Even China generates more than half its GDP in services industries.

In the UK, the big shift took place in the 20th century. Before the First World War, less than 40pc of the workforce was employed in services. More than 60pc worked in industries which produced things: agriculture, mining, construction and manufacturing. By the end of the 20th century, less than a quarter of the workforce was dedicated to these physical and land-based activities. In 2000, more than three quarters of jobs were in services and this trend has continued into the 21st century.

Some people see this as a bad thing and a sign of an unbalanced economy. In my view, this is too pessimistic, for two main reasons.

First, the UK is a remarkably successful exporter of services. We do not just serve each other in shops and restaurants, we produce services which attract customers from all around the world. Indeed, since the middle of last year, overseas sales of services have exceeded the value of manufactured exports.

Exports are not just physical products loaded on to ships. They include everything sold to an overseas customer, including services. The UK runs a surplus in services trade of more than £90bn a year – which more than offsets our substantial deficit in manufactures. As a result, our overall trade deficit is less than 2pc of GDP and is quite manageable.

Business and financial services are a major part of this export success. But many other sectors contribute: technology, including software and gaming; television, music and film; fashion and design; education and health services; travel, tourism and culture; and more. Britain’s long history as an international trading centre, our membership of the EU and our language, culture and expertise all help to underpin our success.

Looking ahead, these activities are also the industries of the future – providing access to financial security, business knowledge, technology, media, creativity, education and better health. Just as Britain was the workshop of the world in the 19th century, it is becoming a hub for the new services industries which are likely to dominate the 21st century.

A second reason to be optimistic about the services-orientation of the economy is the great improvement in productivity which has taken place in manufacturing. Our manufacturing base has been transformed since the 1970s and is now much more hi-tech, efficient and highly skilled. Roughly speaking, we produce the same volume of manufactures with about a third of the employees – a threefold improvement in productivity.

This frees people to work in other sectors – mainly services – adding significantly to the total amount the economy can produce. There are parallels with the improvement in agricultural productivity since the 19th century. Less than 1pc of employees now work on the land, down from more than a fifth in the 1850s.

This shift has not always happened smoothly, however. In the early 1980s, around 2m people were displaced from manufacturing jobs and unemployment went up by roughly the same amount – continuing at a high level until the late 1990s. There was a mismatch between the skills of displaced manufacturing workers and the new jobs in services industries. And workers displaced by plant closures in the Midlands and North were not well placed to take jobs being created in the South.

But that big shake-out is behind us. We have a more flexible labour market and young people have more diverse skills. Despite manufacturing not generating many new jobs, employment is at record levels and the jobless rate has fallen to around 5pc, lower than immediately before the financial crisis.

We are living in a post-industrial economy. Though manufacturing remains a vital sector, services industries are beginning to play the same role that manufacturing did in the past. They are generating export revenue and creating the bulk of the new jobs – and not just in London and the South East.

We should embrace this new reality. A services-driven recovery is an indicator of future economic success, not failure. As long as we maintain the right conditions for employment and investment, our dynamic services industries can underpin the growth of the UK economy in the 21st century.

Our manufacturing base has been transformed since the 1970s and is now much more hi-tech and efficient