We can thank Britain’s services industries for powering the recovery

 
Andrew Sentance
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AS EXPECTED, the latest GDP figures show that the UK economy grew healthily in the third quarter of this year. All the main sectors – services, manufacturing and construction – contributed to growth for the second quarter in a row. This provides some reassurance that the recovery is broad-based, and that the momentum will continue through the remainder of this year and into 2014.

But despite the return to growth in manufacturing and construction, both sectors are well below the level of activity seen before the financial crisis. Manufacturing output is still 9 per cent down on the volume of production at the start of 2008. And construction output is 12.5 per cent below the early-2008 activity level. Services industries are powering the recovery, and last week’s figures show that their output has now surpassed the peak recorded before the financial crisis. The growth of the services sector has also been a major employment success story, creating around 1m extra jobs over the recovery so far.

Not all parts of the services sector have shared in this recovery. The financial services industries have been contracting, along with parts of the public sector affected by the squeeze on government spending. But other public services have been growing despite the spending squeeze – including health and education.

A range of private services activities have been expanding too – including transport and communications, retail and wholesale trade, and hotels and restaurants. But the strongest growth area has been professional, business and support services – including consultancy, accountancy and legal services. Before the crisis, the growth of financial and business services appeared to be closely linked. But over the course of the recovery, they have experienced very different fortunes.

One of the key elements supporting the growth of business services – and a number of other services sectors – has been overseas sales. The UK is a very successful exporter of services – second in the world behind the US. Services exports account for over 12 per cent of UK GDP – the highest share of any G7 economy – and business services is the largest single category. The UK runs a substantial surplus on services trade, which has increased over the course of the recovery, helping to offset a large deficit on trade in goods.

This is an encouraging sign for the rebalancing of the UK economy that government ministers and economic commentators have talked about. It is not the rebalancing towards manufacturing that many people were looking for. Instead, we appear to be seeing a rebalancing within the services sector – with the financial sector and parts of the public sector declining, while export-oriented services – like business services – are growing strongly.

The UK benefits from having a dynamic and flexible services sector, and we have seen its strength coming through in this recovery. While many services activities are geared to serve the domestic market, export success has been a key element powering Britain’s services-led recovery.

Andrew Sentance is senior economic adviser at PwC, and a former member of the Bank of England’s Monetary Policy Committee.