Global services economy to reach $8 trillion by 2025
On the back of broader digital transformation trends and a pandemic-induced impetus, the global services sector is expected to reach a value of $8 trillion by 2025. Western Union Business Solutions and Oxford Economics have traced the sector’s growth in recent years.
The new report notes how services are often intangible and hard to measure, leaving them neglected when it comes to global trade flows. “The phrase 'international trade' typically conjures images of mammoth shipping containers and the exchange of goods produced in remote parts of the world,” said Andrew Summerill, president, payments at Western Union.
“Less commonly thought of is the intangible global trade of services – by this we mean the exchange of expertise, business functions, and intellectual property. As a result, we often undervalue the vital importance of cross-border services trade.”
Indeed, the report revealed that services actually made up 55% of global trade flows as of last year, amounting to a staggering $13 trillion+ in cross-border transactions. Major economies such as the US, the UK, France and Germany, among others, see their services trade add up to well over half of total trade flows.
Of course, this has not always been the case. Prior to the tech revolution that has unfolded over the last two decades, services were considered “face-to-face” interactions, putting them largely out of contention when measuring global trade. Today, consumers use internationally distributed services on a near daily basis.
Consider business-to-business (B2B) services, where professional help is offered in exchange for a fee. In its report, Western Union describes international trade in services as an exchange between residents and non-residents of a country, “including those provided by foreign affiliates established abroad.” Certain big names in the global professional services arena have offices and clients in hundreds of markets around the world.
IT is another example. Most software development that is distributed to computers across the globe constitutes a service. Several consumers around the world have an international bank account or insurance policies – also a service trade. Shipping goods, flying on global airlines, staying in foreign countries, and hiring foreign builders/contractors all fall within this expansive bracket.
While it took a few decades for these services to enter the fray of daily consumption, the last decade has seen them expand like never before. Communication channels are more advanced than ever – social media, videoconferencing, etc. – and consumers are more tech-savvy than ever. The result: global trade in services has grown by 50% in value over the last decade alone, amounting to just over $6 trillion.
Reaching new heights
This was before Covid-19. If the last decade has been impressive for global services trade, the next half a decade will sparkle even more. In the lead up to 2025, Western Union expects the value of global services trade to grow at a compound annual growth rate (CAGR) of 31% to reach $8 trillion. The reason: digitalization was on the fast track before the pandemic, but is running at hyperspeed now.
The forced transition to virtual working forced by the lockdown has been followed by the realization that working from home might just be a productive, cost-effective, and energy-efficient alternative to traditional office-based working. In response, businesses are setting themselves up for long-term virtual working.
“The digitalization of work practices already underway, combined with a shift in attitudes to online work that resulted from the pandemic, will likely reshape nearly every industry in the post-pandemic era. Companies recognize that their survival will depend on the speed at which they adopt new technologies and new mindsets,” explained Summerill.
Driving this change will be a few key segments of the global services trade. In focus is the 5G economy, which is expected to draw $900 billion in investments around the world over the next five years. No doubt, virtual working and digitalization will require a robust and efficient network, presenting itself in the form of 5G.
Then there is the B2B segment, which will come into focus as businesses seek help with digitalization, restructuring, and navigating the new normal. Also in the spotlight is financial services, with digital payments and transfers becoming the core currency sustaining the virtual economy.
“As a result of these trends, we expect digitally deliverable B2B, ICT, and financial services to contribute an outsized share of growth in services trade, or nearly two-thirds (62%) of the expected $1.9 trillion increase in the value of overall services trade between 2019 and 2025,” concluded Summerill.
