Forget Manufacturing: It's Time for Services to Enter the Dragon; ECONOMIC ANALYSIS

Article excerpt

Byline: Russell Lynch

AFTER the catastrophic events of recent years, "more banking" isn't exactly the rallying cry you might expect people to flock to as the UK struggles to pull itself out of the quagmire.

Hopes rest on surging manufacturing and investment to redress the economic balance in a nation powered for so long by financial services. But unpalatable as it sounds, the discredited masters of the universe may have more of a say than the makers in salvaging growth over the long term.

It comes down to the old rule of comparative advantage, basically that everybody will be better off if nations concentrate on producing what they can deliver most efficiently and then trading it. And for many years now that hasn't been manufacturing: our trade in goods has reverted from a surplus of 5% since the 1970s to a deficit of around the same size despite efforts to trim the fat for a decade or more.

As the services bandwagon rolled on, manufacturing shrank to a relatively meagre 12% of the nation's output Despite this shrink, wage inflation in our factories is still a big problem. According to Deloitte, wage costs rose by an average 3.5% a year in the decade to 2007, making a poor contrast with declines in the US and Japan.

Exports have recently recovered massively but the Bank of England worries that imports haven't slowed dramatically even after the pound's fall. Many firms are unable to find domestic substitutes because of our withered manufacturing base. With the latest survey evidence also suggesting that George Osborne's "march of the makers" is close to stalling -- and more disappointing news on output in April -- it's beginning to look increasingly like too big an ask for Britain's manufacturers to sort out the economy on their own.

But compare our vast goods deficit with the healthy surplus in services -- estimated at [pounds sterling]4.6 billion in April -- and then consider the opportunity offered by the world's emerging giants such as China.

Staggeringly, for all of London's status as the world's leading financial centre, China was the destination for just [pounds sterling]203 million -- or 0.5% -- of the UK's [pounds sterling]43.9 billion in financial services exports in 2009, and 1.5% of services exports overall, according to a recent Office for National Statistics study.

The Red Dragon is an untapped market for us: the UK has a services surplus of just 0. …