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Britain’s service sector under pressure

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Do you know that as many as 84% of UK jobs are now in the service sector?

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Recent research from the Resolution Foundation1 revealed that just 8% of the working population is employed in manufacturing and 7% in construction. By far the majority of us work in the service sector, whether that’s in education, the health service, business, retail or the hospitality industry.

It’s a broad church and one that is growing as manufacturing jobs have moved overseas thanks to globalisation. Most of these jobs are now in service industries.

A good example is the city of Coventry. I was a student there in the early nineties and have seen first-hand how a city can radically change. Once the heart of the British car industry, former factory sites have morphed into retail parks, offices and university campuses.

The same can’t be said of Germany, which has taken the car building baton firmly by the hand and built an export-led economy with manufacturing firmly at its heart.

Despite the contrasting make up of these two economies, both the UK and Germany have only just narrowly avoided recession. This week we learned over the recent third quarter the UK economy grew by 0.3%, beating Germany’s 0.1% growth. To qualify for a recession an economy must decline for two consecutive quarters.

While the UK may have avoided falling into recession for now, growth is still sluggish by historical standards, which means the service sector is very much under pressure.

The most obvious place is on the high street. According to the Resolution Foundation 21% of UK jobs are in retail, hotels and restaurants. It’s a crucial part of our service sector and it seems a week can’t go by without a profit warning or complete collapse of an established retail brand. Whether it’s casual dining restaurants like Jamie’s Italian or Strada, or high street favourites like Clinton Cards, Thomas Cook or Mothercare, retail is being hit hard.

Of course, it’s not just the well-known brands on the high street that are affected, it’s also the landlords of the properties with vacant shops on their books. This week we had an update from two of the UK’s leading property developers British Land and Landsec (formerly known as Land Securities).

British Land, which owns shopping centres such as Sheffield’s Meadowhall and Plymouth’s Drake Circus has had almost £600m slashed from the value of its property portfolio in the six months to September. That’s a drop of around 10% off the value of its retail properties.

This has led to a pre-tax loss of £440m over the last six months, compared to a loss of £42m over the same period last year.

Meanwhile Landsec has also seen a dent in its profits. The property developer whose portfolio includes the giant electronic advertising screens on London’s Piccadilly Circus, reported a £147m loss for the six months to September, down from a profit of £42m over the same period last year. It has seen £368m wiped off the value of its property portfolio.

However, while retail has dented the company’s performance, the value of Landsec’s office properties rose slightly by 0.3%. London office property has proved more resilient than expected and despite the ongoing Brexit uncertainty, strong demand, against a limited supply of new offices, has helped keep things stable.

As ever, it pays to be diversified.

Source:
1 Based on data from the Office for National Statistics (ONS) from June 2019

Important information 

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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