As he railed against Brexit last week, Guy Hands was scathing about the challenges facing Britain.
“People are going to Lisbon, they’re going to Paris, they’re going to Amsterdam,” the multi-millionaire private equity investor told Bloomberg TV.
“As that expertise leaves you eventually reach a tipping point where the reason to be in London disappears.”
Such talk is not unusual across the City, as rival countries vie to lure away bankers and consternation builds over companies shifting from the London Stock Exchange to New York.
Trade experts are also quick to point out a sharp decline in our goods exports, which fell more than 9pc below their pre-pandemic average in the last three months of 2022 – the worst performance in the G7 and a drop described by Sophie Hale, an economist at the Resolution Foundation, as a “disaster”.
However, Hale also points to an often-overlooked fact. In services, the biggest driver of the domestic economy, there has been a boom in exports that was not predicted by any mainstream forecaster.
Services exports grew by 17.8pc in real terms from 2016 to 2022 – the strongest growth in the G7, according to Telegraph analysis of OECD data, and far more than in neighbouring countries such as Italy, Germany and France.
This also vastly trumps the performance of Japan and the US, which both suffered declines in their services exports over the same time. Only Canada achieved a boost of a near-similar magnitude to the UK.
Overall, British service exports surpassed previous records in 2022, rising to £397bn.
Pound for pound
Domestic and global factors have helped lift the sale of services abroad ever further, despite heightened trade barriers and a global wave of protectionism.
Gregory Thwaites, an associate professor in economics at the University of Nottingham, says that the devaluation of the pound following Brexit has helped services exports.
Sterling remains around 15pc lower against the dollar than in the weeks before the EU referendum, making anything Britain sells much cheaper to foreigners.
Story continues
Thwaites says it fell because markets judged that Brexit would harm the economy, for example by restricting goods exports to the EU.
“You can actually have a situation where Brexit kind of boosts services trade by harming another sector more,” he says.
It means that – somewhat counterintuitively – the flipside to the much-highlighted weakness in goods is an improvement in services.
The intangible nature of services – which include everything from filming Game of Thrones in Northern Ireland to enrolling foreign students at British universities and designing buildings for other countries – also means they are less sensitive to changing trade terms, as selling a service is often simpler than selling a good.
Scene from Game of Thrones TV series, filmed in Ireland – HBO/HBO
“Some services are highly regulated like banking, but banking was in any case shrinking as a share of UK exports and has been for some time,” Thwaites says.
“Other kinds of services – for example creative industries – aren’t regulated so much.
“Therefore when you get a change in regulation like Brexit, the volumes of services don’t change very much.”
This also means that as the world’s superpowers race to re-shore their supply chains and ramp up protectionism – as with the US’s $369bn Inflation Reduction Act – services mostly fly under the radar.
Cross-border alignments
Services trade benefits from aligned regulatory frameworks and countries recognising each other’s professional certificates – for example, allowing architects or lawyers to work in different jurisdictions.
So far, there has been little divergence there between the UK and the EU. And in any case, the EU only accounts for just over a third of British services exports, in contrast to nearly half for goods.
Companies are also starting to seek out other markets outside the bloc, reflecting a readjustment after Brexit.
Hale, of the Resolution Foundation, says that the rapid growth in services exports has come even as companies sell less to the EU.
Removing volatile components like travel and transport, which have been distorted by Covid and restrictions, reveals “a gradual decline in the EU share of services”, she says.
“It does look like there is a change in the focus of UK exporters in terms of focusing more on non-EU markets,” Hale adds.
Hale says that while there have been some changes to how services exports are measured, which could distort the figures, the improvement over the past decade or so holds up even when adjusting for factors like changing global demand for specific products.
The UK is the world’s second-largest exporter of services after the US. They account for around half of what the UK sells to other countries, which is far higher than for any other G7 nation which ranges from 18pc to 31pc.
It is a long-standing strength, which economists say was already evident more than 40 years ago in 1980 when Britain was still not fully deindustrialised.
It also helps to explain why this part of our economy has proved so resilient through multiple shocks over the past years.
Thomas Sampson, an associate professor at the London School of Economics, says the rapid growth reflects a comparative advantage – meaning Britain can produce the services that it sells with a lower opportunity cost than its trading partners.
“What the UK economy tends to do well is high-skilled services – in particular things like financial services, professional services, that kind of full range of business services,” he says.
“As the UK has become increasingly specialised in those industries, we have seen it reflected in strong export performance for the services. For goods, we’ve seen over many decades the gradual decline of the UK’s manufacturing base and that obviously places a drag on such exports.”
London’s strength
The character of services exports means that London is behind much of the country’s strength, contributing 63pc of the trade surplus in this area in 2018.
While Britons have outperformed foreign competitors in selling services, the UK has also benefitted from a tide that has improved living standards globally and expanded the middle classes.
“As China, India and parts of Sub-Saharan Africa get richer they’re going to want to spend more on TV and education and so on, having satisfied their needs for food and cars,” Thwaites says.
“So development is a story of moving towards services.”
All of these factors mean that services could soon go from making up around half of exports to overtaking goods.
“I wouldn’t be surprised to see that over the next decade or two we move to a position where services account for the majority of the UK’s exports,” Mr Sampson says.
Such a shift would be a reflection of the UK’s strengths – and a repudiation of Hands’ warning over national decline. However, it will be on policymakers to ensure the benefits are felt all across the country.
Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month, then enjoy 1 year for just $9 with our US-exclusive offer.