Guest Blog | Services trade should be a UK strategic priority

The release of UK balance of payments current account figures for 2014 was greeted by the usual shock horror headlines. The deficit in 2014 was close to £100bn, and reached the highest share of GDP recorded since 1948. Our current account deficit of 5.5% of GDP in 2014 exceeded the previous peaks of 4.4% in 1989 and 3.9% in 1974, after the first OPEC oil price shock.

These headline figures were a bit misleading, however. The underlying trade position for the UK has not deteriorated – for 2014 as a whole the deficit in goods and services was less than 2% of GDP and the figures were on an improving trend through the year. The current account figures reflect some unusually large net outflows of income which could turn out to be a temporary phase.

Digging down further into the trade figures we can find more good news. In 2014, the UK’s exports of services hit a new record – nearly £215bn. The value of UK exports of services is now very close to the total value of our manufactured exports (£225bn). In addition, we run a large trade surplus on services – totalling nearly £86bn last year, nearly 5% of GDP. This trade surplus on services more than offsets our deficit on trade in manufactures (£81bn). Both the level of services exports and the services trade surplus reached new highs in 2014.

Because services trade is less visible than goods trade, its importance tends to be underplayed. The UK is a remarkably successful exporter of services – second only behind the US in the world. Services exports account for around 12% of UK GDP, compared with around 8% in Germany and France, 4% in the US and 3% in Japan.

There are a number of myths about services trade which need to be dispelled. The first is that it is all about selling financial services, and therefore we are overly dependent on the City of London for our successful record of exporting services. In fact, the UK has a very diverse range of services exports. Banking, insurance and other financial services do contribute about a third of the total in the UK. But business and professional activities account for a quarter of our services exports. IT, travel and tourism, education and the creative industries – music, film, design, etc – also make a substantial contribution.

A second myth is that services trade does not add as much value to the economy as manufactures. In fact the reverse is true. Manufacturing industry is a big importer of components , energy and raw materials. So the value-added element of £1 of manufacturing exports is lower than the equivalent in the services industries. Work by the OECD suggests that UK services exports generate more value-added for the UK economy than manufacturing trade, not less.
A third myth is that we have exhausted the growth potential of our exporting services industries. Though services account for 70-80% of the output of major economies, their share of total world trade is just 20%. A concerted approach to breaking down barriers to trade in services – both within the European Union and more widely across the international economy – could support further rapid growth, as a recent report from the CityUK Independent Economists’ Group has argued. A PwC report in 2013 found that emerging market imports of services are now larger than the G7 economies – and were growing three times as fast.

Services trade is a big success story for the UK and services exports have significant growth potential. It is likely that within the next five years, UK services exports will exceed our overseas sales of manufactures. A strategic focus on breaking down barriers to trade in services, and maximising our export potential, should therefore be a priority for the next term of government – whichever party wins the forthcoming General Election.

 

 

Services trade should be a UK strategic priority | Guest Blog author | Andrew Sentance | Senior Economic Adviser PwC