Just how imbalanced is the UK economy?
There are plenty of complaints one hears about the UK economy, but perhaps the most frequent one is about it being deeply imbalanced. It includes the following notions: 1. “we don’t make anything any more”; 2. we are overly reliant on consumer spending and 3. we are way, way too reliant on the City and financial services.
Though such notions feel instinctively right, one rarely sees internationally comparable statistics that back them up. After all, when one talks to the French and the Americans, they are often just as worried as Britons that their economies have become overly reliant on consumer spending and services.
Happily the ONS has published a new paper with a few useful tables on the topic. So let’s go through those complaints one by one and see if they stack up.
1. “We don’t make anything any more”
Yes it’s certainly true that the composition of the UK economy has changed: as the pie chart below shows, the amount of UK national income contributed by industrial production (which includes manufacturing) was 41.7% in 1948. Today it’s a mere 14.2%. Services (everything from architecture to hairdressing) has meanwhile risen in terms of its contribution from 45.8% of GDP IN 1948 to 79.1% now.
However, while Britain undoubtedly has a far smaller manufacturing sector than many other countries, the same shrinking phenomenon has happened across most of the developed world in recent years. Consider, for instance, the chart below, showing the size of various countries’ manufacturing sectors over time:
It’s certainly true that Britain’s manufacturing sector has shrunk fast in the past few decades. And that it’s smaller than many other G7 countries’. What’s striking, though, is that other countries – everywhere from France and Italy to the US and Canada have seen a broadly similar (if not quite so vertiginous) drop. The main outlier here is China, which is even more reliant on manufacturing than it was in 1965. Even Germany’s manufacturing sector is a less important component of its GDP than a few decades ago.
2. We are overly reliant on consumer spending
Looking at the breakdown of what we produce (eg manufacturing vs services) is only one way of dissecting the economy though: another is to look at how we spend our money – how much is household consumption, how much goes on exports and how much is invested? Here again, the notion that Britain is an inveterate spendthrift is pretty much borne out by the data, though, again, we are hardly alone.
As you can see, the UK’s reliance on private consumption (eg household spending) is higher than most other G7 nations, but is lower than in the United States. The reliance on imports and exports is more or less in the middle. What really stands out is how little of Britain’s GDP is accounted for by spending on investment – a mere 15%, compared with 19% in the US, 24% in Canada and 49% in China. While you’d hardly want to be competing with Beijing, the UK level is worryingly low.
So, on this comparable basis, there is certainly something to the notion that Britain could be spending a bit less on household consumption and a bit more on investment – though having said that, compared with 2008 our consumer spending has risen far less than in other G7 nations.
And it’s worth pointing out that the ONS are in the process of revising how they measure investment, as this piece by Chris Giles in the FT explains. Whether that would change the picture above is another question.
3. We are way, way too reliant on the City and financial services
Here again the evidence is more damning. According to this chart, in the late 1990s and early 2000s the share of UK GDP accounted for by the finance and insurance sectors was, at under 6%, lower than in Canada, the US and Japan. But since then Britain has become far more reliant on finance. In part this reflects the fact that other parts of the economy have shrunk. but it is nonetheless a stark comparison.
The final table, below, further supports the notion of an extreme reliance on financial services. According to these data, Britain isn’t actually as poor at exporting as many might assume: exports of goods accounted for 19% of GDP in 2012 – higher than in Japan and the US, and not much lower than France. The real difference comes in when you consider exports of services. Britain is by far and away the leader here, with 13% of GDP accounted for by services, almost double the nearest competitor, Germany.
But note the column at the far right: this shows you that of the UK’s service exports (which, remember, are already very large), almost a third are accounted for by financial services. This won’t be much of a surprise to those sad enough to read this blog on a regular basis – I’ve been talking about it for some time. It’s striking all the same.
So there you have it. Britain does make stuff – just not as much as it used to (then again, the same is true elsewhere). It does spend too much on consumption and not enough on investment. And it is disproportionately reliant on finance. You may have suspected as much; now you have a few charts to back it up.