Professional services drive UK economic growth

Professional services have been a key driver of UK growth this year, underlining the wide-ranging sector’s resilience as momentum slows in other parts of the economy.

Output in professional services, scientific and technical activities grew 0.7 per cent in the third quarter even as overall growth slowed to 0.1 per cent, marking the largest contribution to the expansion, according to Financial Times analysis of official data.

The sector — which spans law, architecture, research and development, consultancy, market research and other fields — grew by 3.9 per cent in the three months to September compared with the final quarter of last year.

The rate is three times the 1.3 per cent expansion over the same period of the overall UK economy — which chancellor Rachel Reeves has promised to “kick-start” after a lacklustre performance since the 2008 global financial crisis.

“Professional services have been the locomotive of UK growth this year,” said Robert Wood, economist at consultancy Pantheon Macroeconomics. “While consumer demand has disappointed through the first half of 2024, business-to-business and R&D spending has been much more robust.”

Industry figures and analysts said the data was a sign of resilience in sectors where Britain had a leading role internationally, with strength in services exports expected to help shield the UK from possible higher trade tariffs by US president-elect Donald Trump.

Professional services account for more than 8 per cent of the UK economy — larger than car production, construction and education and equivalent to the entire manufacturing sector.

In the third quarter of 2024, output in professional services was up 16 per cent on the fourth quarter of 2019, before the Covid-19 pandemic, compared with overall economic growth of 3 per cent.

The sector “has recently been punching above its weight”, accounting for 30 per cent of the annual growth rate of overall GDP in the second and third quarters of 2024, said Paul Dales, economist at Capital Economics.

Scientific research and development is the subsector that has grown the most so far this year, but the larger subsector of legal activities has also performed well.

Richard Atkinson, president of the Law Society, which represents solicitors in England and Wales, said the legal industry was “without question a key contributor to the UK economy, is consistently growing and remains resilient even in challenging economic conditions”.

He added that the sector, the second-largest in the world behind the US, benefited from a “global talent pool” and from English law being “recognised as the international standard in many sectors and chosen by clients around the world for their commercial contracts”.

The Office for National Statistics figures chime with data from the Royal Institute of British Architects, which last week reported that revenue from chartered practices increased by 13 per cent in the 12 months to May, topping £4bn for the first time. Revenue growth in overseas markets was up 25 per cent to £1bn in the same period.

Adrian Malleson, head of economic research and analysis at RIBA, said the figures painted a “very positive picture of UK architecture”, which was “well placed to win international work because of its high-quality design” and helped by London’s status as a global hub.

While political uncertainty and low public investment had made the UK a “difficult market”, he said the Labour government’s strong mandate and focus on improving the public estate would boost architectural practices.

With falling interest rates, “we’ll see greater investment from smaller clients, particularly in the housing market, which will help smaller practices”, he added.

The data on professional services will be welcomed by Reeves, who pledged in the Budget last month to begin “a decade of national renewal” and has previously vowed to lead the most “pro-growth” Treasury.

But the challenge of jump-starting business investment and improving productivity was underlined by a leading survey last week, which found corporate sentiment fell to a 13-month low in November. On Monday, the CBI lobby group warned that UK businesses were cutting their plans for growth after the tax rises set out by Reeves in her maiden fiscal event.

Dales said professional services “may not continue to grow at recent rates” but could, with more R&D spending on artificial intelligence and medical technology, “continue to perform better than the wider economy”.

In many sectors — such as financial and insurance activities, entertainment, employment and travel agencies, and accommodation — output has fallen this year, while construction and manufacturing production remained stagnant.

Output in accounting, auditing and tax consultancy — another subsector of professional services — has fallen this year, but is 10 per cent up compared with before the pandemic.

One bright spot was IT and other information services activities. The sector is smaller than professional services, making up 3.2 per cent of the economy, but has grown at a rate of 5.2 per cent this year.

Strength in professional services and IT has helped UK services exports, which, despite a setback in the latest quarter, are up 13 per cent compared with December 2019, before the pandemic. Goods exports are down 24 per cent over the same period.

Emily Fry, senior economist at the Resolution Foundation think-tank, said the UK’s exports specialisation had “doubled down in the areas that we were already specialised in pre-crisis”.

Ministers should recognise that “these are areas that the UK does well and should be supporting, both through domestic policy, but also through international policy”, she added.