UK set to return to form as global leader in services exports – EY ITEM Club

30 June 2014

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  • UK second largest services exporter in the world behind only the US
  • Services sector is focused on the ‘right’ markets, with an improving economic outlook for the UK’s key exporting partners driving growth
  • Out of the UK’s major competitors, only Japan is expected to achieve higher levels of growth in services exports in the next five years

The UK is expected to regain its pre-eminent position in the global rankings for services exports over the next five years, repairing the damage caused by the global financial crisis, according to an EY ITEM Club special report published today.

The report shows that the UK has a central role in the global market for trade in services, ranking only second behind the US in terms of its share of global exports. Using OECD data, the EY ITEM Club report finds that the UK’s success is founded on its ability to focus on the fastest growing markets. The analysis shows that the geographic focus of UK exports added 13.8% a year to UK services export growth between 2002 and 2007, more than for any other major exporting country. However, our main export partners then saw activity slump during the financial crisis with demand in those countries adding just 0.3% a year to export growth in 2008-11.

Looking forward, the EY ITEM Club says that the UK’s export performance is ‘on the mend’. The report is forecasting average annual growth in the UK services sector exports of 7.2% over the next five years, with only Japan expected to achieve higher levels of growth at 7.6%.

Martin Beck, senior economic advisor to the EY ITEM Club, comments: “Services exports are a jewel in the crown of the UK economy, accounting for 40% of total UK exports and are continuing to surge ahead and contribute positively to the economy. The UK’s services sector has maintained its focus on the ‘right’ export markets, in marked contrast to overseas goods sales where the UK continues to underperform. We expect exporters of services to build on the momentum of the improving economic outlook in these markets and achieve a robust recovery.

“While we don’t expect export growth to get anywhere close to the pace achieved prior to 2007, it’s nevertheless going to represent a significant step up on the performance since the financial crisis.”
Improving economic outlook of the UK’s main trading partners drives export growth

The geographical split of the UK’s services exports shows the US is the dominant player. The US accounted for 22% of UK services trading in 2012, more than the next four countries added together. According to the report, an improving outlook for the US economy will be key to the UK’s export services recovery. US GDP is expected to average 3% a year, corresponding to a strong improvement in import demand.

UK exporters have also been slowly re-orientating towards faster-growing emerging economies and oil producers. Although their shares of UK services exports remain small, the growth in exports to these economies over the past decade has been impressive, pushing the share of total exports accounted for by OECD economies down from 79% in 2002 to 74% in 2011.

Martin comments:  “After a sticky start to the year, the US economy looks set to pick up generating increased demand for imported services, while key European markets are also showing signs of life. Moreover, robust economic growth in countries like China and India will translate into improving living standards, an expansion of the middle classes and a shift in economic activity towards consumption. These factors will bring the needs of these countries closer into line with the areas in which UK exporters excel.”

Business and financial services key sectors for UK exporters

According to the EY ITEM Club report, business services and financial services are dominating the UK’s services exports. In 2013 business services accounted for 30% and financial services for 25% of overall services exports. The two sectors are forecast to achieve above average growth rates over the coming five years, enabling them to continue to gain share of UK exports.

Martin comments: “There are signs that the financial sector is coming out of the doldrums. With London’s reputation having survived the financial crisis largely intact and the UK as a whole continuing to benefit from its natural advantages of language and time zone, we expect financial services exports to continue to recover. The UK’s dynamic business services sector also looks set to sustain its recent strong performance, having developed a reputation as a world leader in areas such as legal and accountancy services and latterly enjoyed growing success in the creative industries.”

Chris Price, Managing Partner, UK Financial Services at EY, added: “Historically, the UK’s strength in financial services exports has been founded on two pillars. First; innovation in capital markets, and second; facilitating trade between mature and emerging markets. Both of these areas of expertise are set to lose much of their power in driving exports.

“However, if the UK is to sustain its rising financial services exports into the future, the industry must respond to the changing, ever-more digital world and target new sources of growth, such as innovation in financial technology, new payment methods and improving the transparency of financial data, as well as helping emerging markets companies raise capital in mature markets.”

Impact on the economy

Martin concludes: “The impact on the wider economy from a robust recovery in services exports will be positive. The existing large surplus on trade in services is expected to widen further, reaching 6% of GDP by 2018, helping to move the UK’s current account back towards balance. This will also provide a useful support for the UK economy at a time of austerity, when the public sector is likely to act as a drag on growth and employment.”