When the recession hit at the tail end of 2007 the UK economy was heavily affected. Almost all sectors were damaged and are still recovering. However, in theory, we would not expect the economy to just revert to how it was before. This article aims to look at early evidence that the UK economy has undergone a structural change and the sectors that are growing now are not necessarily the sectors that were growing before the recession.
When the financial markets collapsed triggering the recession in December 2007, one of the greatest tragedies was the devastation of consumer confidence. Markets are very dependent on confidence because if consumers fear the worst, for instance losing their jobs and loss of purchasing power leaving savings worth less than just a few years prior, they will not spend. When money is not being spent business cannot perform well or even operate, as revenue will have fallen. When businesses are not performing very well they must accept lower revenues and to maximise profitability under these conditions they must make cuts, reducing fixed and variable costs of production.
Therefore, as the UK economy continues to recover; it is unlikely to recover in a uniform manner. If company X employed 100 workers and earned a turnover of £100,000 before the recession, it would be naive to think that they would employ 100 workers and earn £100,000 when the economy has fully recovered.
Before the fall in 2008 Production and Agriculture were the dominant sectors, to clarify the Y-axis is GDP as a percentage of GDP in 2010, thus represents income, and not employment. When the crisis hit all sectors fell by similar magnitudes with the exception to construction, which was harder hit and discussed in previous articles. However when one considers the results for 2013, the service sector is the largest contributor, and production one of the lowest.
Although somewhat crude, this demonstrates that the UK economy is structurally different in 2013 when compared to pre-crisis levels. This view is not universal, and the government issued contradictory statements in a publication about employment Unfortunately they do not disclose the numbers or the theory that these findings are based on. They suggest the only sector struggling (in terms of employment, not income as the diagram displayed) was construction. They also suggested that sectors with an increasing share of employment continued growth. However, this could be misguided in terms of the service sector particularly as the service sector used the recovery to its advantage, as it was able to emerge stronger, but at the cost of the production sector, as it continues to lose out to low cost international competition.
There is further evidence to suggest that the economy is indeed changing and if curious, the following the following link, shows growth rates of various companies. Furthermore, it is worth looking at the increasing emergence of the creative industries, and the manner by which the pre-recession of growth was 5%, compared to present day, at 10%.
The UK economy is likely to be different after the recovery than it was before. There are already findings to suggest that the relative importance of certain sectors are changing, and this is only from the evidence we can observe thus far. This is important from a markets point of view because one cannot assume companies and sectors will regain previous positions when making investment decisions. Therefore one should also account for the damage the financial crisis had, the way in which spending patterns have shifted (temporarily or permanently), and which companies and sectors are performing well in the aftermath.