Author: Mark Richards

The number of small and medium-sized enterprises (SMEs) in the UK is increasing rapidly. Is this good for the UK economy? And what does it say about our rapidly-changing patterns of employment?

Early last week there were encouraging figures from the UK’s manufacturing and construction sectors. Well, you would expect manufacturing to do well, as it has benefitted from the fall in the pound since Brexit. And the government’s commitment to investment in infrastructure has to be good news for the construction sector. What the experts were not expecting was good news from the UK’s service sector.

But when the figures came out the service sector completed a hat-trick of good news for the UK economy, as Markit’s Purchasing Managers’ Index for the sector rose to 55.6 – two points ahead of the previous month and well ahead of an expected fall to 53.3. (Don’t worry: the figures are explained below.)

Hang on: what is the ‘service sector?’

The cheap and easy answer is to say anything that is not manufacturing or construction – and that is about right. One simple explanation of the service sector is ‘anything you cannot hold in your hand:’ so, for example, retail, banks, hotels, education, computer, and software services, recreation, media, communications and the leisure industry. Crucially, the service sector accounts for 78% of the UK’s economic output – so if the service sector is doing well, the economy as a whole is doing well.

And what is the ‘Purchasing Managers’ Index?’

The Purchasing Managers’ Index (PMI) is best described as a measure of confidence in future economic prospects. It is a survey taken every month among private sector companies and, as the name suggests, it is the purchasing managers of those companies that are surveyed for their future buying intentions.

The results are expressed as a figure: any figure above 50 represents overall positive feelings from the relevant managers about future prospects, and any figure under 50 represents negative feelings. Very broadly put, above 50 and the relevant sector is going to expand: below 50 and it is going to contract.

So if we say, ‘May’s PMI increased to 55 from 54 in the previous month’ it means that the purchasing managers were confident in April – and they were even more confident in May.

There is a PMI for each sector of the economy: manufacturing, construction and the service sector.

Why is the service sector important?

It is easy to think that a country’s wealth comes from sectors like manufacturing, mining, agriculture and construction: that providing each other with ‘services’ is not really that important.

But taking the world as a whole, the service sector accounts for 64% of gross domestic product (GDP) – roughly, the total value of the goods and services a country produces. As a general rule, the more advanced an economy, the more people work in the service sector. As above, the service sector accounts for 78% of our GDP. Even Germany – famous for its remorseless trade surplus each month – still relies on services for 71% of its GDP, while in China – where you would think they do nothing other than manufacture things – the service sector accounts for 52% of GDP.

If you want an impressively low figure, you need to go to a country rich in natural resources: in Saudi Arabia, for example, the service sector accounts for just 31% of the country’s GDP.



Why has the UK service sector done well?

It has done well largely thanks to the growth in – and success of – small businesses. New research from the Hampshire Trust Bank and the Centre for Economics and Business Research (CEBR) has revealed that the number of small and medium-sized enterprises (SMEs) in the UK has grown by almost a quarter over the last five years.

Leading the way was the ‘office administration and business sector’ with the number of SMEs increasing by 76% between 2011 and 2016. Second place went to ‘human health services’ with a 50% rise.

The cynic might retort that this is not real growth in the service sector; it is simply people becoming virtual assistants or personal trainers.

But it is Friday morning: the weekend is upon us. Let us try and stay positive. After all, every business has to start somewhere: Apple was once a college dropout building a computer in his garage. Virgin was once someone who left school at 16 selling records in a student magazine.

“The service sector is vital to the UK economy,” said the CEBR’s Nina Skero, “So it is encouraging to see that over the past five years growth has been particularly strong in these areas.”

Why an increase in small businesses is good for the economy

Small businesses are unquestionably good for the economy – they are innovative, they drive growth and they stimulate local economies. If Tesco want a shop fitting out they use a national firm: if it is a local business then there is work for the local electrician, joiner, glazer and plumber.

In 2014 there were an estimated 5.2m businesses in the UK – more than 99% of them SMEs. In the US – where the service sector accounts for almost 80% of the country’s GDP – there are between 25m and 27m SMEs: they account for between 70 and 80% of all US jobs. Innovative? According to the US patent office, SMEs produce 13 times more patents than large corporations.

What does this say about the future of employment?

There is no doubt that the nature of work is changing. In the past automation and mechanisation meant that boring and repetitive jobs were replaced by a machine: cost-effective automation replaced people. But as AI and machine learning advance, it is not just the ‘boring and repetitive’ jobs that are coming under threat. Now, as the saying goes, we will need to prepare our children for jobs that do not exist in industries that have not yet been invented.

What will be needed are ‘soft skills.’ So far, machines are poor at replicating human interaction and understanding. ‘Please,’ we mutter as we navigate our way through another endless automated call center, ‘Just let me talk to a real person.’

A recent paper from Goldman Sachs – quoted in the Independent – suggests that virtually everyone will be self-employed at some stage in their life. And yet legislation – and taxation – continues to operate on the basis that we are employed. We still educate people to think of ‘getting a job.’

Right now ‘the gig economy’ is focused on Uber and Deliveroo drivers. Ultimately, we are all going to be in the gig economy. If you doubt it, go on to a site like Fiverr and look at a vast range of services that are available.

In their paper, Goldman Sachs talk about the need for re-training at the top end of the economy. They use the example of a lecturer in modern languages who loses his job because student demand for his subject dries up. Goldman Sachs says he that he cannot quickly re-train as a management consultant. No, but the next day he can be on Fiverr and other freelance sites offering top-end translation services to industry.

The gig economy offers us flexibility and more control over our work/life balance. In short, it offers what every study says that millennials want – and they will make up 75% of the workforce by the middle of the next decade. The old ways of working, of being employed and of being taxed accordingly are gone for good. That presents a huge challenge to our societies and our governments: let us hope that they can adapt as quickly as the workforce is doing…