In the latest issue of the Deloitte Economic Review, our Economic Adviser, Roger Bootle, considers the prospects for different sectors of the UK economy over the next two decades. His main points are as follows:

• The shape of the UK economy is set to be remoulded by the continuation of the two major economic forces which have influenced it over the last decade – the trend away from goods towards services and intangibles, and the ever-growing tide of globalisation.
• One result is that manufacturing’s decline is likely to continue. As a developed country grows richer, extra demand tends to fall disproportionately on services rather than goods. Consumers spent 53% of their nominal income on goods forty years ago. Now that share is just 32%.
• Moreover, there is still plenty of scope for more manufacturing activity to be transferred to Asia, as well as increasingly to Russia and Eastern Europe. I think that manufacturing’s share of GDP will fall from its current 13% to more like 11% over the next ten years.
• Relative decline does not necessarily mean absolute decline, though. And not all areas of manufacturing will suffer. The UK has developed a competitive edge in many areas, from nanotechnology to aerospace. The pharmaceuticals industry, for example, could easily see its share of GDP triple over the next two decades from its current 0.5%.
• But most of the winners in the relativity stakes will be in the services sector. The financial sector is very well placed to take advantage of the opening of global markets. International banking and fund management firms should thrive as a result of further globalisation.  I expect financial services to account for 10% of GDP by 2020, up from its current 8.3%.
• If the financial sector continues to grow rapidly, so should all the business services, such as accountancy and legal services, dependent on it. New types of business services altogether should also develop. Firms will increasingly need to seek regulatory advice on “green” issues, in particular.
• A richer and more open world economy should provide a considerable boost to the UK’s tourist industry. By 2020, China is expected to have overtaken the US and Japan as the main source of overseas tourists. Meanwhile, the projected rise in the share of the UK population over retirement age from 19% to 25% over the next 20 years opens up growth opportunities in old-age health care.
• That said, some areas of the services sector are still likely to see their role in the economy diminish. Government-related services will feel the squeeze from the Chancellor’s plans to keep a tighter lid on public spending. And the high street is likely to lose out further to online sales.
• Outside the services sectors, probable winners include the housebuilding sector, given the Government’s targets for affordable homes. And the growth of the biofuels industry offers a ray of light for a sector which for a long time has been in terminal decline – agriculture.
• Admittedly, the biggest changes already appear to be behind us. Nonetheless, in 20 years’ time, the economy will still look significantly different from the economy of today. These changes will create some losers, but overall there will be far more winners.
• As for short-term economic prospects, the US slowdown and the high sterling exchange rate are likely to take their toll on the UK’s external sector. But consumers and the government are not - for once - in a position to offset this weakness fully.
• I expect GDP growth to ease a touch from 2.7% last year to 2.5% in both 2007 and 2008. While clearly a modest slowdown by historical standards, this would disappoint UK policymakers who expect growth to remain robust this year. 
• Lingering inflation concerns could yet prompt interest rates to rise again. But falling energy prices should take CPI inflation to just 1.5% by the end of 2007. And below-potential growth should keep inflation below its 2% target in 2008. I expect interest rates to fall next year to 5.0%.

For further information, download our latest Economic Review publication

Ends

Notes to editors:
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte.  If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or 020 8948 4605 (home), via email on business@capitaleconomics.com.

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