As UK manufacturing output hits a two-year high, will Brexit rebalance the economy away from services?

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Damian Hind, economic & social policy research fellow at Policy Exchange, says Yes.

Brexit is not a magic wand but it does give us reasons to be optimistic. Increasing manufacturing output and rebalancing the UK economy away from services has been a long standing goal for policymakers. However, the UK’s high exchange rate made this very difficult.

Brexit, albeit accidently, has given the UK economy, and the manufacturing sector in particular, exactly what it needed – a much more competitive exchange rate. By making it cheaper for foreigners to buy the things we make, it has created precisely the sorts of conditions policymakers have been praying for.

In the longer term, once the UK has left the EU’s Customs Union and has agreed free trade agreements with other economies, British manufacturers will have the opportunity to expand by selling in new markets. The government will also have the flexibility to cut certain duties on domestic producers so they no longer have to pay to sell into our own domestic market, as they do now. This could help burgeoning industries to grow considerably.

Patrick Minford, professor of applied economics at Cardiff Business School, says No.

The idea Brexit will “rebalance” the economy away from services is ludicrous on two levels.

First, why would an economy with less service activity be in better “balance”? The UK’s comparative advantage as a nation full of skilled workers is in… services and related activities like hi-tech manufacturing.

Second, Brexit is a move away from EU protectionism of food and manufacturers, away from inefficient EU regulations and away from the EU’s open door to uneconomic unskilled immigration. As we move to freer trade and more competition, we will move the economy closer to our comparative advantage vis-a-vis services and hi-tech manufacturing.

My research team has calculated the order of magnitude of this shift due to Brexit. These moves will lower consumer prices by around 8 per cent and stimulate the services industry by some 10 per cent. The resulting rise in household living standards and in GDP would be 4 per cent. Brexit will rebalance the economy beneficially towards services.