With GDP up 0.5 per cent in the fourth quarter of 2015, should we worry that services are propping up growth?

Dinner In The Sky Over Berlin
Services grow while traditional manufacturing is in decline. But does that matter? (Source: Getty)

Chris Williamson, chief economist at Markit, says Yes.

The dependence on services is a concern, but no surprise. Manufacturing, more exposed to overseas competition and demand, was faring well in 2014, before being hit by a strong pound and weak global growth. But this leaves us with an upturn that remains reliant largely on the domestic market and consumers in particular, which in turn suggests growth is only being sustained by record low interest rates and zero inflation. The worry is that if one of these props was removed then the recovery would falter. So we remain dependent on central bank largesse and the imbalances that this creates. A longer-term worry is that many services, like consulting, only thrive when located near where goods are produced. Take manufacturing away and related activities, which help foster longer-term growth and wealth creation – not to mention foreign reserves – also decline. So while the current disappointing news on manufacturing may prove temporary, it’s important to ensure that policies are in place to engender brighter longer-term prospects.

Ben Brettell, senior economist at Hargreaves Lansdown, says No.

Continuing the trend of weaker construction and production output, with growth driven by services, yesterday’s figures furthered concerns that our economy’s reliance on the services sector is increasing, and traditional manufacturing is in decline. These concerns are overplayed. The increasing dominance of services is an extremely long-term trend. In the post-war economy, services accounted for less than half of output – this has steadily grown to around four-fifths today. This trend has also been observed across much of the developed world. An explanation can be found in David Ricardo’s 1817 theory of comparative advantage. It shows that countries can all be better off if they specialise in industries in which they are relatively more efficient, and trade with each other. Today, emerging markets have an advantage in manufacturing, whereas developed countries have an advantage in services (especially financial services in the UK). Specialising in what we can do efficiently, rather than trying (and failing) to compete in what we cannot, has made us (and the rest of the world) better off.

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