Britain, consultation nation

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A lot of the discourse about the UK’s economic problems involves criticising politicians for not recognising what Britain is good at, or for seeing what Britain is good at and not liking it.

Here are a couple of political problems with this framework:
— The most economically important sectors (growth imperative), aren’t always those that employ the most people (keep-your-seat-at-the-next-election imperative).
— It’s not that easy to tell what Britain is good at.

And here are some charts:

So, in the four quarters to September 2023, the UK exported £180bn of ‘Other business services’, more than double its exports of financial services, and five times cars. The idea of the UK as a “services superpower” is commonly accepted, but . . . what kind of services?

Friend of Alphaville Dan Davies recently wrote about this on his Substack:

We [the UK] dominate the world when it comes to “doing miscellaneous stuff”. Nobody can touch us when it comes to “things that don’t fit in any other category”

Davies reckons a “hell of a lot” of this ‘Other business services’ category is lawyers, but actually it’s UK management consultants who are king. Data from the Office for National Statistics’ latest Pink Book, released last October, provide a breakdown within this whole category up to September 2022.

It shows the dominant exports within this category: management consulting, “services between affiliated enterprises”, and R&D:

Looking at it another way, if we were to split off these three industries, here’s where they would rank among all exports (based on 2022 figures):

Who are these management consultancies? Some are big companies employing that intellectually homely person you remember from sixth form who now posts on LinkedIn a lot. Others, as Davies says, are:

Small consultancies, often built around one or two experienced professionals who have had half a career in management roles in some other industry or in public service, and have then gone into business providing advice in a particular niche.

In other words, management consultancy exists as a mushy category, housed within the mushy category that is services, housed within the mushy category that is exports, housed within the mushy category that is trade.

Davies adds, with our emphasis:

This is the British Mittelstand, and I think any industrial strategy for the UK has to take into account the things that we’re actually good at, rather than what seems whizzy and cool. Germany has a massive hinterland of small manufacturing companies that, to use the slogan, “make the thing that makes the thing inside the thing”. The UK has an equally significant hinterland of businesses based out of the Old Rectory somewhere, all based around someone who “knows the person who knows the answer to the question”.

How to address this group with an industrial strategy (if one is even needed) is obviously a troublesome question. We might presume the answers include things like “better broadband”, “stop pissing off the countries they want to work with” and “stay out of their way”.

What’s most interesting though is how important they already are to the UK’s trade balance. As Deutsche Bank’s Shreyas Gopal writes in a note published Monday:

Away from the fall in energy prices, there’s a more structurally supportive story playing out for the UK’s recovering trade balance: the ongoing strength in service exports. Indeed, the trade balance in services is close to the highs at nearly 6% of GDP. Within the various service sectors, the agglomerated group of “other business services” has, in aggregate, overtaken financial services as the UK’s biggest net export sector over recent quarters.

He continues:

So what’s going on? We get a clue from looking at where exactly the UK is selling these services at an increased rate. It’s not the EU, where the recent fluctuations in net services trade are almost exclusively down to the collapse and subsequent rebound post-Covid in tourism. Instead, recent growth is down to booming UK service exports to the US, adding over GBP 75 bln or 2.5% of GDP to the current account.

The culprit, Gopal reckons, is sterling:

The pound is a highly relevant factor here. The main input cost in a lot of these services is likely to be wages. And, even accounting for the catchup in UK wages in and last year’s bounce in Cable, in real terms it is still very cheap by historical standards for US firms to hire UK firms or outsource work to their UK-based affiliates.

Can this continue? We think so, especially since our view of broad dollar strength through the first part of the year would keep UK services cheap from an American perspective.

If Gopal’s theory is correct, then things look even tougher for those politicians. An incredibly diverse sector with inherently diverse interests and needs, which benefits from currency devaluation. No wonder Rishi Sunak and Keir Starmer aren’t buying banners that say “consultation nation” on them — even if it is true.