The new services driven economic trajectory

New York, 04 Aug 2016

With manufacturing and industrial production expected to plateau over the next decade, the services sector will become an increasingly important driver for global growth.

Over the past 25 years, one billion new jobs have been created globally, 75 per cent of which have been in services. The sector now accounts for 46 per cent of global employment, up from 34 per cent in 1991.

Understanding how this structural shift will change the way economies operate and evolve is key to understanding which sectors should deliver above average economic growth, Macquarie Securities North American economist David Doyle says.

Implications for economic and inflation volatility

Some of the biggest implications of the shift should be lower overall economic volatility and less inflation volatility, says Doyle.

The reason for this development is that services are relatively stable compared to the industrial and goods sectors, which have historically served as overall indicators of economic activity.

Services are now increasingly dominant in shaping the outlook for global growth and are less prone to the volatility in employment and output that has caused large shifts in economic activity from quarter to quarter in the industrial sector.

As developed economies transition away from manufacturing, their investment focus is turning increasingly to technology and innovation which is helping to drive growth in services.

Consumption of services is also less volatile than the consumption of goods, and inflation in the services sector is less prone to wide swings.

“The cycles should be less pronounced, meaning we will likely see less extreme swings on the downside as well as on the upside,” explains Doyle.

“Ultimately this means more stable growth cycles going forward.”

Over the last four decades, services have also increased their contribution to the gross domestic product (GDP) in both developed and emerging markets.

In developed markets, services’ share of GDP is now close to 75 per cent, compared to 53.8 percent in 1970. In emerging markets, services account for 57 per cent of GDP, an increase of nearly 15 per cent since 1970.

As developed economies continue to transition away from manufacturing, their investment focus is turning increasingly to technology and innovation – as well as protecting the related intellectual property – which is helping to drive growth in services.

Doyle says there is steady wage growth in design services, computer systems and the building equipment sectors.

Enterprise software, data, analytics, travel, internet and staffing services are also among the sub sectors that are expected to benefit from growth in the services economy. An aging population and higher levels of discretionary spending will boost the travel industry, for example.

India and China – drivers of the future

To date, the shift towards services has been most dramatic in developed economies. However, Doyle says the developing world, particularly India and China, has extraordinary potential for growth as they move out of the agricultural sector and subsistence living.

“More of their workers will move away from working the land towards roles in the services industry,” he explains. Over the next 25 to 40 years that will see some workers move into the automation and manufacturing industries, however most will be in services.  

“The success of global growth over the next 40 years may depend on how far India and China proceed down that path to a services driven economy,” says Doyle.

For a full copy of the report, ‘Global services – a new economic order’, please contact your Macquarie representative.

Learn more about Macquarie’s research capabilities.