Even in the second half of the 20^th century, the relative decline of agriculture continued a-pace. In 1950, for example, agriculture accounted for 6% of GDP, a share that by 2006 had dropped to just 1%. The fall was even more marked in terms of jobs.

Yet today, more people in Britain are fed to a higher standard than ever before, and the bulk of the food consumed is home produced.

There is no contradiction in this because agriculture’s decline has been relative rather than absolute. The output table (not the measure that the industry itself prefers) shows that activity in agriculture turned down earlier than GDP as a whole, and 2007 was just the most recent of several years of negative growth in the last 15 years. Agricultural output peaked in 2006, since when its decline has been absolute as well as relative.

Any advanced industrial or highly developed economy would expect the share of its resources devoted to agriculture to diminish over time. Yet it remains a sizeable sector, using some 77% of the total land area of the UK and employing around 300,000 people.

The food chain in the UK is estimated to be worth around £75 billion of consumer spending (plus part of the £80 million spent at restaurants, cafes, etc.), £10 billion of exports and involves merchants, manufacturers, wholesalers, retailers and caterers, as well as farmers and consumers.

In recent years, the agricultural sector has had its toughest time for over half a century for reasons unconnected with the macro economic environment.

As well as the highly publicised difficulties associated with BSE and foot and mouth, farmers have had to cope with an unprecedented downward pressure on prices, an over-supply of many products, an increase in regulation, a sharp appreciation of sterling and a reduction in official support, all of which has put severe downward pressure on incomes.

Some relief is coming from sterling’s recent depreciation against the euro, but this may only be a temporary phenomenon since it does not reflect a shift in the economic fundamentals between the UK and euroland.

After reaching £5.04 billion in 1995, total income from farming (TIFF) declined steadily to a low of £1.53 billion five years later, a drop of almost 70%.

A modest rise followed, but was checked in 2003, when TIFF stalled at £2.84 billion. TIFF weakened over the next four years before bouncing back to an estimated £3.46 billion in 2008, still less than 70% of the 1995 figure.

Much of the improvement after 2000 was attributable to sterling’s depreciation against the euro rather than an upturn in market conditions.

Income from farming per full time person has followed a similar path. TTIF per full-time equivalent in real terms 2008 prices) reached £29,803 in 1995, dropped to £8,772 in 2000 before recovering a little to £18,185 in 2008.

The UK’s deficit on trade in food reached a new record in 2008 when it topped £17 billion with imports more than twice as high as exports. The UK’s self sufficiency in food is now 75%, a drop of ten percentage points in a decade.

For longer than most domestic industries, agriculture has been an ‘international’ activity.

Pricing, aid payments and production quotas for British farmers (and the gamut of the Common Agricultural Policy provisions) have often been determined at an EU rather than national level, and fluctuations in the value of the euro have a major impact on farm payments.

Moves to liberalise global trade through the WTO (currently the Doha Round), moreover, have been a key global influence on UK agriculture.

To these on-going pressures have been added in more recent times domestic issues such as the emergence of the major high street food retailers, supply chain rationalisation and concerns about ‘healthy eating’.

For an industry in apparent long-term decline, the pace of change and levels of political and public attention have been intense.

For British farmers, the need to adapt to change and to diversify their activities have always been the keys to survival and growth.

Looking ahead, opportunities are likely to arise in the food service sector and in the food manufacturing and processing sector. If consumers are not going to eat more, they will eat smarter and farmers can capture a greater proportion of the value in the supply chain by adding more value themselves to their own produce.

Like agriculture, manufacturing has had to endure a long, slow relative decline over the last 60 years.

From 36% of GDP in 1950, manufacturing’s share had fallen to 13.3% by 2005, a process often referred to as ‘de-industrialisation’.

This is a common feature of most traditional industrial economies, but it seems to have happened faster and gone further in the UK than elsewhere.

The consequences have been a loss of over three million jobs since 1950, a third of which has occurred just since 1997, a declining share of world markets, rising import penetration and the emergence of a balance of trade deficit on manufactures of almost £60 billion.

Although there has been a decline in manufacturing as a percentage of GDP, it would, however, be wrong to conclude from this that there has been a long-term fall in manufacturing output.

In 2007, the index of manufacturing output was at its highest-ever level, although this larger volume of output was produced by fewer firms using fewer workers.

In the 1990s, manufacturing output increased by 9% in real terms, which followed a 21% increase in the 1980s. The fact that in recent years manufacturing output has been relatively stable does not mean it is in absolute long-term decline.

Table 7.2: Manufacturing Output By Sector 2004-08

(index numbers, volume terms, 2005 = 100)

What puts the fluctuations in manufacturing, and the sector's job losses, in sharper focus has been the strong growth in services, which now contributes nearly 75% of GDP.

Services growth in the 1990s, of over a third, was four times faster than manufacturing, since when it has continued to expand (by 21%) at a time when manufacturing output has been falling.

Even if the decline in manufacturing is only relative, it creates more problems for the UK economy than the similar trend in agriculture.

• In the first place, manufacturing is larger and the overall impact is therefore greater.
• Secondly, given the heavy concentrations of some industries in particular locations, it affects certain parts of the country disproportionately.
• Because manufacturing is more internationally-focused than most service activities, moreover, there are major balance of payments implications resulting from the sector’s under-performance.
• Finally, since many service activities are manufacturing-dependent, there will come a point when services growth will be constrained.

The UK’s problem, along with much of the developed world, is that it is difficult to compete with the emerging countries of Asia and Latin America on the basis of cost.

Wage levels in the UK, plus costs such as land, taxation, regulation, etc., have made the production of many basic products here unprofitable and more is now sourced overseas. Even allowing for transport costs, it is still cheaper for British buyers to import these goods.

This loss of comparative advantage in industries such as textiles, clothing and basic metal goods is entirely understandable.

These tend to be low added value activities which trade essentially on price and it is not surprising that producers in (say) Asia, with lower wage costs, newer technology and larger scale operations, are more competitive.

For countries like the UK and the rest of the EU, it is important to shift the industrial base into the higher added value sectors, those which rely on science, knowledge, capital, skill, etc., the sort of advantages older industrial countries should have.

For Britain, the future of manufacturing should lie more with satellite communications equipment than footwear.

The choice going forward is stark but obvious. Do It Cheaper, but this is difficult for a country like the UK which has high living standards to support. Or Do It Smarter, and focus on the higher added value/higher productivity industrial activities which will create the most wealth per worker.

Although the UK’s manufacturing base accounts for less of the economy than it did in 1980, what there is now is probably in better shape than a generation ago when manufacturing was a more dominant activity.

• Some of this is attributable to the inward investment that has been attracted to the UK over the last two decades.
• The available data show that, compared with British firms, these UK subsidiaries of foreign parents have higher output, investment and exports per worker, and higher wages, because they operate efficiently in the faster growing sectors.

Manufacturing still matters to the UK, but not all manufacturing represents a more productive use of national resources than some domestically-based activities such a services or construction.

Over the last 40 years, changes in construction output have exaggerated movements in GDP. When the economy picked up, construction rose faster, and when national activity turned down, construction fell further. Both the booms and the busts were bigger in construction than elsewhere.

In addition to the volatility of the sector, there have been some major structural changes in the composition of construction output over the last 30 years.

From 1980, the public sector became less important as a customer of the building industry, although now, stimulated by the Chancellor’s spending on public sector services, it is making a comeback.

This decline of the public sector partly related to the policy of privatisation, which transferred to the private sector activities previously classified as public.

In addition, the political climate was unfavourable to government (central and local) spending in areas such as housing, whilst the late 1980s boom gave a huge boost to private sector construction, particularly offices and retail developments.

For much of the 1990s, the industry experienced a difficult time and only in 2001 did output finally recover to the previous peak of 1990. After that, output edged up unevenly to a new peak in 2007 before dipping again with the onset of the recession.

The industry today is smaller (in terms of the number of businesses and employees) than in the 1980s and is dealing with a rather different market profile.

Once the most cyclical of industries, construction after 1996 was more stable, enjoying a long period of unbroken but modest growth before again falling foul of the slowdown in GDP.

Table 7.3: Construction Output by Sector

(£ million 2005 prices)

In current prices, construction output was worth £124bn in 2008, split between new work (55%) and repair and maintenance (45%).

Of the new build sector, private commercial (35%) has replaced housing (30%) as the largest subsector. Industrial building adds another 6% while the remaining 29% is accounted for by public sector spending (18%) and infrastructure (11%).

Table 7.4: Construction Output by Sector

(annual % changes)

Infrastructure involves both the private and public sectors. Both Conservative and Labour governments have looked to change the way this business is managed and financed by trying to involve the private sector to a greater extent in the provision of public services.

In addition, because the government effectively rents or leases the building or road from the private sector builder, the costs (to the taxpayer) are spread over the life of the asset.

This development the Conservatives called the Public Finance Initiative (PFI) and Labour subsequently re-named Public-Private Partnership (PPP).

One of the largest subsectors (30% of all services, 23% of GVA), public sector services such as:

• health and education
• as well as public administration (the civil service)
• and the armed forces,

have been the poorest-performing for a decade or more.

Public sector spending has been a sensitive political issue, with New Labour lurching from prudence and profligacy. The onset of the recession, however, has meant Chancellor Alistair Darling has used the public sector to fill the gap in activity left by the retreating private sector.

The largest service activity is now Business Services and Finance (40% of services and 30% of GVA), which covers not only:

• banks and other financial institutions

but also the whole range of business services such as:

• advertising,
• computer software houses,
• legal practices,
• estate agencies and
• property companies.

Having been one of the most buoyant and dynamic sectors of the economy in the period up to 2008, parts of it (banking in particular) have become major casualties of the recession.

Rapid increases in lending growth underpinned the rapid growth in both GDP and the banking sector, as a surge in credit boosted spending in the economy as well as banking activity.

This has now gone into reverse, to the extent that a number of financial institutions are effectively in the public sector whilst they are placed on a more secure longer-term footing.

The effect of the resulting ‘credit crunch’ will not only be to dampen down contributions from the banking sector but also to risk undermining the pace of recovery as firms and households find essential credit harder to obtain.

Rapid growth was also recorded by the Transport (5.2% pa between 1997 and 2008) and Communication (9.1% pa) subsectors.

Growth in these areas reflected faster economic growth generally (such as deliveries to retailers, more leisure and business travel) as well as the huge expansion in telecommunications, in particular, mobile phones and broadband.

Since telecommunications accounts for only a third of the subsector’s 12% share of Total Services, however, its impact on GVA is limited although it has been the best-performing activity over the last few years. But even though demand for mobile phones has held up in the last couple of years, most of the companies in the sector are struggling under the burden of debt that arose from the auction of the 3G licenses whilst the revenue benefits of the new added-value services have yet to come through.

The remainder of services (20%) is taken up by Distribution, Hotels and Catering.

All these activities are very clearly linked into consumer spending and, therefore, it was the personal sector that first fed growth in the sector and then led activity downwards in mid 2008.

Although growth has now gone into reverse, increases of a little over 3% in constant prices in the 1995-2006 period outpaced the economy as a whole and the sector expanded (more hotels, restaurants, etc.).

Now, however, the climate has changed and the next few years are likely to be quite challenging. As consumers' disposable incomes are squeezed, discretionary items such as hotel stays and eating out are likely be cut back and adjustments to capacity are inevitable.

The remaining industries are all broadly related to the energy sector, in particular mining and quarrying (including oil and gas), electricity and gas. Water supply is also included in this group.

Demand for these sectors reflects the growth of the economy as a whole, since demand is split across the personal and corporate sectors.

Over the long-term, oil, gas and electricity have been the winners and coal the principal casualty, but in all of these sectors output has been squeezed very hard in the last couple of years.

In the energy and water industries, for example, there has been a wholesale change in ownership, as the activities were transferred from the public to private sectors.

In virtually every other industry, moreover, changes in structure occur continuously through merger and acquisitions.

In retailing for example, a very obvious feature has been the growing domination of the major food multiples at the expense of the independent stores.

A similar trend of growing concentration has been evident in financial services, where the number of players falls and the average size rises.

This raises issues about the public interest, consumer protection, etc., the supply side of the economy (see 5.1 Microeconomic Policy – Macro v Micro). All that need be said here is that the process of change is inevitable, and the pace of change is accelerating, as a result of technological developments and the market place becoming increasingly globalised.

A country which once held a comparative advantage in a particular activity (such as the UK in textiles or steel) has no right to expect to maintain that advantage indefinitely. Newer (and cheaper) competitors will emerge and (in this example) the UK will have to look for alternative uses of resources.

This transition can most easily be achieved in an economy that is stable and growing sustainably.