Britain as a service sector superpower

Britain as a service sector superpower

Britain imports far more than it exports and has run a sizeable trade deficit for most of the last 50 years. Yet Britain is also the world’s fourth largest exporter, up from sixth place in the world rankings in 2018. Despite Brexit and poor domestic productivity, the UK remains a major exporter, with only the US, China and Germany selling more overseas.

• Britain’s export success has been driven by services, not by manufactured goods, where the UK runs a sizeable trade deficit. The UK is the world’s second-largest exporter of services after the US but in 14th place in terms of manufactured exports, down from 6th place 20 years ago. UK exports of manufactured goods have faced growing competition from Chinese and other emerging market producers with, more recently, Brexit, supply chain problems and rising energy prices adding to the sector’s problems.
• Over time UK exports of services have grown significantly faster than exports of goods. Services are now more important for UK exports than goods, having risen from about 25% of total exports in 2000 to 54% today. The UK is the only major industrialised country in which, services, rather than goods, make up the majority of exports.

• The UK’s export success is all the more striking given the poor performance of financial service exports in recent years. Financial services were by far the biggest driver of service exports in the decade or so before the global financial crisis (GFC) since when the volume of exports of financial services has shrunk. In the light of the crisis some UK financial institutions sought to reduce risk on their balance sheets by cutting their exposure to overseas markets. The Bank of England has also suggested that over the last 15 years global demand for financial services may have shifted away from areas in which the UK specialises.

• Rising UK exports of services since the GFC have instead been driven by ‘other business services’ which consists of professional and management consulting and technical, trade and research and development services. These industries have delivered 37% of the total growth in export services since 2008. There have been smaller contributions from telecoms, computer and information services that have grown at a rapid rate but from a smaller base, as well as travel services, intellectual and property services and insurance and pension services.

• The UK’s exit from the EU has dented goods trade with the bloc but had little obvious effect on trade in services. As the Resolution Foundation notes, “services trade doesn’t appear to have taken notice of Brexit, growing 14.0% between 2019 and 2023 – faster than France, the US and Japan”. The EU’s single market has made less progress in liberalising trade in services than in goods. As a result, losing access to it may be a greater problem for manufacturers than for service businesses. Britain’s services trade is, in any case, less dependent on the EU, which accounts for 36% of UK service exports compared to 47% of UK goods exports.

• Britain runs a large surplus on trade in services, equivalent to just under 6% of GDP. However, this is insufficient to offset fully a deficit in goods equivalent to about 7% of GDP. Britain’s appetite for imports of manufactured and other goods far exceeds its ability to sell them overseas. Excellence in services is not enough to compensate for a large deficit in manufactured exports.

• Yet in a world where goods exports have to contend with protectionism and a difficult geopolitical scene, Britain’s specialisation in services looks like an advantage. Brexit, the pandemic and a fraying of the global order have had surprisingly little impact on the UK’s exports of services. Exports of financial services have suffered since the GFC, but other sectors, particularly business services, have performed strongly.

• Declining technology costs and the spread of Anglo-American language, culture and business practices suggest that global demand for services will continue to outpace demand for goods. The UK looks well-placed to benefit from this growth.

PS: In the Monday Briefing two weeks ago, I wrote that: “Over the summer a Gallup poll found that [UK public] dissatisfaction with the education system and the NHS is at the lowest level since data started to be collected in 2007”. Of course what I meant to say was that satisfaction had dropped to the lowest level since 2007. Thanks to Nick Owen and Rob Stewart for spotting this error right away.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.5% at 8,230. 

Economics

• The US Federal Reserve lowered its benchmark interest rate target by 0.5 percentage points to 4.75%–5%, the first cut since 2020
• Global stock markets reacted positively to the news, with the S&P 500 reaching record highs on Thursday
• The US Securities and Exchange Commission unanimously approved certain stocks to be quoted in half-cent increments ($0.005) from November 2025, saying it would lower costs for investors
• The Bank of England held interest rates at 5% reflecting a “gradual approach” to cutting rates. Markets expect further rate cuts this year
• UK inflation remained steady at 2.2% in the 12 months to August, slightly above the 2% target. Services inflation rose more than expected, from 5.2% to 5.6%, suggesting continued domestic inflationary pressures
• UK public sector debt reached 100% of GDP for the first time since the 1960s
• UK retail sales rose in August by 1%, driven by “unseasonably strong” food and clothing sales and warmer weather
• UK consumer confidence fell in September to the lowest level since January 2024. GfK, who compiles the index, commented that “consumers are nervously awaiting the Budget decisions on 30 October”
• UK house buyer enquiries increased by 19% in August compared with the same month last year
• UK house prices grew 1.6% in the 12 months to July, according to official data, while prices in London fell 0.4%
• Government spending on health-related benefits in the UK has increased 34% in real terms since the pandemic while spending in similar countries has fallen, according to new research from the Institute for Fiscal Studies
• The UK-EU Trade and Cooperation Agreement has had a ‘stifling effect’ on bilateral trade, according to researchers at Aston University who estimate that UK goods exports are 27% below where they would have been in a ‘no-Brexit counterfactual’
• New EU car registrations fell sharply by 18.3% in August compared with August last year, with registrations in Germany falling by 27.8%
• German economic sentiment worsened more than expected in September, according to ZEW, underscoring the country’s current economic weakness
• The Bank of Japan left interest rates unchanged at 0.25%, citing a modest economic recovery despite “high uncertainties” regarding activity and prices
• The People’s Bank of China held its key lending rate at 3.45%, in line with expectations
• Canada opened North America’s first rare earth processing centre amid concerns over China’s dominance in the sector

Business

• The UK government is considering an adjustment to their proposed policy of “day one rights” for employees by allowing six-month probationary periods for new hires, reported the FT
• Coffee and sandwich chain Pret a Manger’s reported turnover rose above £1bn in 2023 following large overseas expansion 
• The FT reports that forthcoming strikes at a number of US ports are likely to cause renewed disruptions to supply chains and could add to price pressures
• US dollar store chains are continuing to expand “aggressively” despite weaker earnings and growing competition from other low-cost retailers, the Wall Street Journal reports
• Amazon announced office-based staff members are required to work from the office five days a week from January 2025, the latest of several large employers to do so
• UK media company Guardian Media Group is in discussions with Tortoise Media to sell The Observer, the world’s oldest Sunday newspaper
• Dutch bank ING will consider ending finance to clients that do not make progress on climate emissions by 2026
• The EU’s General Court annulled a €1.5bn fine imposed on Google by the European Commission relating to charges of anti-competitive advertising practices. The EU is expected to appeal against the decision
• Blackrock, Microsoft and MGX announced a new $30bn investment fund focusing on infrastructure projects for artificial intelligence
• An open letter with signatories including technology company Meta and music streaming company Spotify warned the EU that “inconsistent regulatory decision making” would restrict the full benefits of artificial intelligence
• The insurance industry’s use of artificial intelligence to tailor insurance plans could leave some customers “uninsurable”, said the chief executive of the UK’s Financial Conduct Authority, Nikhil Rathi
• The Earls Court Development Company submitted plans for the development of a 40-acre central London site, costing approximately £10bn
• UK resident doctors, previously known as junior doctors, voted to end an 18-month dispute with the government by accepting a 22% pay rise
• Members of the Aslef union for UK train drivers have agreed a pay deal worth approximately 15%, ending over two years of strike action
• Old computer systems and transmission bottlenecks were blamed by the National Grid for not effectively utilising batteries, which can store power generated from green energy sources 

Global and political developments

• The Wall Street Journal says that Israel and Hezbollah are as “close to full-out war as they have been in their nearly yearlong conflict”
• The United Nations called for global regulation of artificial intelligence to fully realise AI’s benefits for all and to address the risks to security and energy
• More than 1m people have died or been injured in the war between Russia and Ukraine, the Wall Street Journal reports
• The EU is planning to raise up to €40bn in new loans for Ukraine this year despite political roadblocks, the FT reports
• Chinese car companies have warned that future investment in the EU may be “re-evaluated” if the EU approves higher tariffs against imports of Chinese electric vehicles next month 
• A suspected assassination attempt on former US president Donald Trump was thwarted by the Secret Service, only months after a previous attempt in Pennsylvania 

And finally… two squirrels caused a commotion after boarding the 08:54 Great Western Railway train to Gatwick Airport. After unsuccessful attempts to lure the squirrels off the train with food, the service was eventually cancelled - disruption on the branch line