3 May 2016

Britain’s Flat White Economy takes off but success is not assured

By Douglas McWilliams

The last time a part of the economy was associated with coffee was in the eighties when the service economy was derisively called ‘the cappuccino economy’. Norman Willis, the then leader of the TUC, upped the stakes in frothiness, calling it ‘the candyfloss economy’.

It is tempting to view the Flat White Economy today as much the same. But the statistics should halt that thought in its tracks. The mix of activities from software to digital advertising and marketing is now the UK’s second largest business sector, accounting for around a tenth of GDP. Nearly half the UK economy’s recent growth is attributable to it directly or indirectly. If this is just froth, we must live in an extremely frothy society. These calculations are based on the government’s input output statistics. Alternative data on a slightly different definition from Tech City claim that 5% of all jobs are now digital, growing at 11% annually, and that they pay an average salary of £50,000 or 36% above the national average.

As Anthony Hilton wrote in the Evening Standard a couple of weeks ago , what’s new is that ‘the geeks have discovered business’. The technology has been around for a while but the applications to make it economic have burgeoned in the past 5 years. And East London has been the epicentre.

Two trends have driven this growth. The first is the UK’s extraordinary leads in both online retail and online advertising. The second is the amazing supply of talented young people from the rest of the EU and elsewhere who have arrived in East London partly as a result of Southern Europe’s euro-driven economic crisis. These migrants not only provide skills but when they work together they strike sparks of creativity. They come partly because of the lifestyle; they get jobs to fund this lifestyle.

To justify the wages that can provide a comfortable standard of living in a high cost Western economy, employees have to be productive. Creative jobs in the digital economy are one of the few sectoral opportunities to generate such a level of productivity. High productivity jobs are becoming much harder to find not only in most parts of manufacturing but even in areas of the service sector like finance.

The economic regeneration implications of the Flat White Economy contrast with the traditional focus on building roads and providing grants to build factories. Evidence from the US shows that the best ways to stimulate a local Flat White Economy are to have a successful higher educational infrastructure, high quality connectivity and a lively cultural scene. The film industry around Los Angeles, the music industry in Nashville, higher education around Boston and Austin, Texas are all driving the growth of Flat White Economy locally. Music in Brighton, film in East London and media in Glasgow and Leeds are playing the same role in the UK. Silicon Fen in Cambridge has similar spin offs.

The world leader in digital jobs is Israel where the spin off from the huge defence industry means that 9% of all jobs are digital. But the UK’s 5% give us the European lead, though we are only slightly ahead of Sweden with 4%.

But, while most projections show the Flat White Economy on track to overtake construction in the next decade to become the country’s largest business sector, this continued growth is not assured. East London is becoming expensive and overgentrified; rents for both residential and commercial property are pricing out the lower value jobs. South London is becoming the new East London but space is running out.

Growth is taking off in many other parts of the UK – Leeds is the largest Flat White Economy outside London while Edinburgh, Brighton and Birmingham are the fastest growing. But if London starts to fail, growth elsewhere will not fill the hole.

Only continued supply of property to match demand and cap rents and improved transport links can keep this financial pressure of rising costs in London at bay. And, while the most likely form of Brexit, with the UK staying in the Single Market and hence having to continue to accept free movement of labour would not limit the supply of skilled migrants that are the industry’s lifeblood, the rising pressure to control immigration is becoming a serious threat to the sector.

The Flat White Economy has emerged largely without (and sometimes despite) government intervention. But for it to continue to grow, Whitehall must pay more attention to the industry’s changing needs. If Flat White fails, there aren’t many other games in town.

Douglas McWilliams is President of the economic consultancy Cebr which he founded in 1993. The updated version of his book The Flat White Economy was released in paperback on 24 March 2016.