The UK Innovation Report 2021

Structure of the UK Economy

Policy questions addressed in Theme 1

1. How has the structure of the UK economy changed in the last few years?
2. Are these changes affecting economic performance?
3. How does this compare with other countries?

What the data tells us

What the data tells us

In recent years the UK’s labour productivity, as measured by GDP per hour worked, has grown somewhat slower than in other developed economies. In 2018 the UK’s labour productivity was barely above its 2007 level (Chart 1.1).

Sector-level analysis reveals key structural factors behind the relatively slow rates of productivity growth in the UK. Over the last decade, there has been an increase in the relative contribution of sectors with low value added per hour worked (particularly low value services) and a reduction in the share of high value added sectors (particularly medium to high-tech manufacturing, oil extraction and finance) (Charts 1.2 and 1.3). There has also been a shift in employment between sectors, with the share of jobs in lower value added services experiencing the largest increase (Chart 1.4).

Medium to high-tech manufacturing has significantly outperformed other parts of the economy in terms of productivity and wage growth(Chart 1.5). While this sector represents only 4.8% of gross value added and 2.9% of employment, it accounts for 34% of the UK’s exports and almost two-thirds of business R&D expenditure (Chart 1.6). Medium to high-tech manufacturing represents a significantly higher share in countries such as Germany (14.1%) and Korea (21.1%), compared to the UK (4.8%) (Charts 1.7 and 1.8).

While the UK records a surplus in its trade in services, this is more than outweighed by a deficit in the trade in goods. In 2018 the trade deficit was around 1.8% of GDP. In other countries, such as Germany and Korea, manufactured goods have historically underpinned a positive trade balance (Chart 1.9).

The COVID-19 pandemic has disrupted global supply chains, production activities and demand across industries and countries. Unlike China and Korea, countries such as the UK, Germany and the US have not yet managed to return to pre-COVID production levels (Chart 1.10).

Labour productivity: international comparison

Source: OECD (2020). Level of GDP per capita and productivity data set. Notes: See Appendix 1 for sector definitions.

• In recent years the UK’s labour productivity, as measured by GDP per hour worked, has grown somewhat slower than in other developed economies.
• In 2018 the UK’s labour productivity was US$58.5 (constant prices 2015 PPP), barely above its 2007 level (US$56.9).
• Between 1999 and the outbreak of the global financial crisis in 2007, the average annual growth rate of UK labour productivity was 2.2%; between 2010 and 2018 it was only 0.3%.
• On a GDP per hour worked basis, UK productivity in 2018 was:
  • Lower than that of the United States and Germany, by 21 and 32 percentage points, respectively.
  • Above that of Japan and Korea, by 22 and 32 percentage points, respectively.

Labour productivity: sector-level analysis (1)

Source: OECD (2020). STAN Industrial Analysis database; Office for National Statistics. Notes: See Appendix 1 for sector definitions.

• Sector-level analysis can help explain the relatively slow rates of productivity growth in the UK.
• Over the last decade there has been an increase in the relative contribution of sectors with low value added per hour worked, notably “Other services”(e.g. retail, hospitality and administrative services), which have increased their share in the UK economy from 50.3% in 2007 to 52.1% in 2017.
• Meanwhile, sectors with high value added, such as medium to high-tech manufacturing (which includes pharmaceuticals, aerospace and automotive) and other production (which includes oil and gas extraction), have seen their share in the UK economy reduced.

Labour productivity: sector-level analysis (2)

Source: OECD (2020). STAN Industrial Analysis database; Office for National Statistics. Notes: See Appendix 1 for sector definitions.

• Chart 1.3 presents a breakdown of productivity figures (as measured by value added per hour) for the three economic activities with highest value added within each sector.
• Extraction of crude petroleum and natural gas reports the highest value added per hour, although this figure has declined by over 60% in the last 10 years. Meanwhile, its contribution to the UK’s value added has been reduced from 1.5% to 0.6%. These figures reflect the decline of UK oil and gas production as well as drops in international prices.
• Within knowledge services, financial and insurance activities show the highest value added per hour. However, their share in UK value added has dropped significantly (from 8% in 2007 to 7% in 2017).

Employment in the UK

Source: Office for National Statistics; OECD (2020). STAN Industrial Analysis database. Notes: See Appendix 1 for sector definitions.

• There has been a worrying shift in employment between sectors over the last decade. Low value services report the largest gain in employment share (1.1%).
• Meanwhile, medium to high-tech manufacturing, the sector with the highest value added per hour worked, reports a significant contraction in its share of UK employment (from 3.4% to 2.9%). In absolute terms, employment in this sector stood at 786 thousand people in 2017, a 9.5% decline from 2007.
• Knowledge services, in contrast, have experienced an increase in both, labour productivity and share in UK employment. In absolute terms this sector employed 6.6 million people in 2017, a figure 10.1% higher than in 2007.

Changes in the structure of the UK economy

Source: Based on data from Office for National Statistics and Department for Business, Energy & Industrial Strategy. Notes: £ values deflected using PPI (labour productivity) and CPI indices (wages); see Appendix 1 for sector statistical definition.

• The largest share of employment is concentrated in other services (growing from 58.1% in 2008 to 58.4% in 2018), but it has experienced a decrease in wages in real terms.
• Meanwhile, medium to high-tech manufacturing has significantly outperformed other parts of the economy in terms of productivity, with an average annual growth rate of 4.9% in the last decade. This sector reports both the highest wages and the largest increase in their real values over the last decade.
• Low to medium-tech manufacturing also reports productivity improvements, albeit more modest.

Structure of the UK economy

Source: Based on data from Office for National Statistics and Department for Business, Energy & Industrial Strategy. Notes: See Appendix 1 for sector definitions.

• Chart 1.6 shows the contribution of UK sectors to export and business R&D (BERD).
• “Other services” contributes to around half of the UK’s gross value added but less than one-fifth of exports and only around 2% of business R&D expenditure.
• Meanwhile, knowledge-intensive services (such as finance, professional services and ICT) account for around 30% of both exports and business R&D.
• Medium to high-tech manufacturing accounts for 34% of exports and almost two-thirds of business R&D expenditure.

Structure of the UK economy compared (a)

Source: OECD (2020). STAN Industrial Analysis database. Notes: See Appendix 1 for sector definitions; value added data is based on chained prices of the previous year. US data is based on current prices.

• The UK, France and the US present a broadly similar economic structure, with other services accounting for over 50% of national value added in 2017.
• Among the economies analysed, medium to high-tech manufacturing represents a significantly higher share in Germany (14.1%) and Korea (21.1%).
• Meanwhile, in the UK, France and the US, medium to high-tech manufacturing accounts for less than 5% of domestic value added.
• Among the countries analysed, only Germany and Korea have observed increases in the shares of medium to high-tech manufacturing over the last decade.

Structure of the UK economy compared (b)

Source: OECD (2020). STAN Industrial Analysis database. Notes: See Appendix 1 for sector definitions.

In contrast with value added, the distribution of employment across sectors is more even among the countries compared.

The largest shares of employment are observed in other services (e.g. wholesale and retail, real estate, public administration). This sector accounts for at least 60% of employment across countries, with the exception of Germany, where it accounted for 57.7% in 2017.

Meanwhile, with the exception of Germany, medium to high-tech manufacturing accounts for less than 10% of the total employment.

Trade balance of the UK compared

Source: UN Comtrade. Notes: Trade balance is based on gross exports and gross imports of all goods at HS 1992 2-Digit level and all EBOPS services (excluding services not allocated).

• The UK, France and the US recorded trade deficits in almost all years between 2000 and 2018.
• In these three countries trade surpluses generated in services are more than outweighed by deficits in the trade in goods, both manufactured and non-manufactured.
• The UK’s trade deficit for the total economy was the highest in 2011, at ~US$159B, but it has since improved to ~US$46B, in 2018, with increased surpluses in the services trade and decreased deficits in goods trade. For France and the US, their trade deficits widened to ~US$67B and ~US$658B, respectively, by 2018.
• In contrast, Germany and Korea – which have significantly higher shares of medium/high-tech manufacturing – have consistently recorded trade surpluses in most years since 2000. Their large surpluses in manufactured goods trade more than offset the deficits in services and non-manufactured goods trade.

COVID-19 impact

Source: UNIDO (2020). Monthly Index of Industrial Production.

• Mobility restrictions due to the COVID-19 pandemic have disrupted global supply chains, production activities and demand across industries.
• Unlike China and Korea, countries such as the UK, Germany and the US have not yet managed to go back to pre-COVID production levels.
• In the UK some of the manufacturing industries most affected are: automotive (-52% average annual drop March–September 2020); apparel (-37%); and machinery and equipment (-28%).