A Two Speed Story

Services and Manufacturing in the UK - at Moneyweek.com - the best of the international financial media

Over the past 25 years, the UK services and manufacturing sectors have diverged dramatically. Their average rates of profitability drifted apart, and the share of manufacturing output in the economy has fallen steadily while that of services has risen. The services sector's share of UK GDP has now risen to 75% while the share of manufacturing has fallen to 15% half of what it was 30 years ago. While the manufacturing sector is often described as being in a state of structural decline, the services sector continues to drive UK GDP growth. Will this trend persist?

In a recent report (Services and Manufacturing: A Tale of Two Sectors, V Pillonca and D Miles, July 14, 2005), we addressed the question of whether the UK would essentially become a service economy. To answer this question we analyse two key measures of profitability for each sector: the rate of return on capital and profit margins. The real rate of return on capital is a broad measure of return on investment. In 1Q 2005, the real rate of return on capital in services was 2.9 times that in manufacturing (17.5% compared with 6.0%).

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