Merryn's Blog

Britain’s caffeine-fuelled economy is heading for a comedown

The only thing keeping the UK’s economy growing is the fact that we all like a nice cup of coffee. That's not enough, says Merryn Somerset Webb.

150504-coffee

I went on the Today programme on Radio 4 on Saturday morning to talk about a quirk in the UK GDP numbers.

Last week's numbers were mildly disappointing (quarterly growth was up 0.3%, compared with 0.6% in the previous quarter) and the most recent Purchasing Managers Index (PMI), while still positive, also showed a slowdown on weak export demand.

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Overall, the GDP numbers showed that everything except for private services showed slightly negative growth. Worse, inside private services, the export-orientated services the UK tends to rely on (financial services, architecture, etc) also slowed.

The only bit that really showed growth was hospitality. Yes, it turns out that pretty much the only thing keeping the UK's growth show on the road is the fact that we all like a nice coffee out. Is that, James Naughtie asked me, a bad thing?

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The first thing to say is that GDP numbers of this sort aren't generally very accurate. When I interviewed Roger Bootle of Capital Economics last week, he noted that, despite having managed a very fast growing business for 14 years, he has never seen the form managers are supposed to fill in to provide the stats for the calculations; I haven't either. So it isn't a given that UK growth is 100% dependent on the flat-white craze continuing.

There's also good reason for the other sectors to be flatlining right now. The election isn't helping who wants to start a new housing development before an election that is all about housing? The same goes for any deals in financial services, given the clear antipathy in the Labour party towards the sector. Nor is the strength of the pound against the euro up 20% since the summer. After the election, things might be different.

So, on to the coffee. There are good reasons for this sector to be expanding: the rise of single households and of the retired as a cohort in the UK economy. These groups spend much more on leisure and eating out than other groups, so the more of them we have, the more the mid-level restaurant and coffee house sectors will grow. That much is set in stone.

The point, however, that the BBC were keen to make on Saturday is that these sectors can't possibly do all the work. The fact that services as a whole are a huge part of our economy doesn't matter very much at all.

We tend to get hung up on the idea that we don't make anything any more (although the manufacturing sector did grow 4.6% last year) but the truth is that writing an insurance contract on a Chinese ship or a Mongolian mine is just as worthy (and possibly offers greater value added) than building the ship in the first place.

Being world class exporters of financial services, engineering, tourism, education and architecture is all good comparative advantage theory suggests that we should concentrate on what we are good at and we are good at services (as Napoleon snottily pointed out all those years ago).

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What isn't good is being dependent on just one small domestic subsector for growth. Coffee is nice, but it isn't enough.

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