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In the latest issue of the Deloitte Economic Review, our Economic Adviser, Roger Bootle, considers the outlook for the UK’s financial services sector. His main points are as follows:
“The financial services sector has been one of the UK’s biggest success stories in recent years. And it is likely to continue to go from strength to strength, bringing increased prosperity to the UK economy.
“Not only has the financial services sector consistently punched above its weight in driving GDP growth in recent years, but it has produced a significant trade surplus for the UK. Much of this success derives from London’s position as the world’s leading centre for international financial services. And the boom in mortgage lending and consumer credit has supported the domestic retail financial services found on the UK’s high streets.
“There is every reason to expect the financial sector to continue to take an increasing share of GDP. The onward march of globalisation opens up a realm of new international markets which the UK can take advantage of. There is a huge accumulation of savings in Asia, which will gradually become available to invest around the world.
“The UK’s financial sector can also expand into new product areas altogether. For example, the search for yield has prompted firms to move into increasingly risky areas, resulting in a demand for new products to hedge against this risk. And London has a strong track record for developing and trading innovative new products.
“Of course, the continued success of the UK’s financial sector depends on London retaining its ability to take a high share of global financial business. But there is little reason to expect London to lose its numerous advantages over other international financial centres.
“Not only is London likely to retain its good regulatory system and a flexible labour market, but it will continue to benefit from its so-called “clustering advantages”, whereby financial firms like to locate close to others in the same sector.
“Indeed, new international financial centres in China and India are unlikely to take away much, if any, of the business London does with the rest of the world. After all, even well-established financial centres like Paris and Frankfurt cannot match London’s comparative advantages. In fact, if anything, as countries such as China and India get richer, they will turn to London to fulfil their mushrooming need for international financial services.
“That is not to say there are no immediate risks at all, with perhaps the most obvious being a sharp global economic slowdown. And in the face of what is likely to be a prolonged slowdown in household borrowing growth, the domestic retail banking sector is likely to have turn its energies elsewhere, perhaps to the savings market instead.
“Overall, though, the outlook for the UK’s financial services sector remains favourable and I expect the financial services sector to continue to grow in importance.“
Russell Collins, head of financial services at Deloitte, comments:
"London has always been at the forefront of innovation and growth in the industry. The recent rapid expansion of hedge funds and private equity has been heavily centred around London, and the city has led the development of many of the innovative new derivative products.
"The UK has a strong but flexible regulatory regime and a deep pool of expertise. However, London does face a number of challenges to retaining its advantage. Much of the wholesale business based in London is owned by non-UK institutions and, with mobile capital and people. With an increased focus on tax rates, there is a risk of these institutions relocating away from the UK. The FSA is also striving to move from excessive reliance on rules to principles based regulation, essential to retain dynamic markets.”
"You only have to look at the FTSE to see the importance of the UK financial services industry. In 1984 there were no UK banks or insurers in the top 10 of the FTSE 100, now there are four. Financial institutions account for around one third of the FTSE 100 by total market capitalisation, reflects the strength of the industry in the UK, the extent of consolidation and the international nature of the business."
Roger Bootle continues:
“As for the UK economy as a whole, a full recovery from last year’s soft patch has now been seen. Not only has consumer spending growth regained some momentum, but other sectors are also providing a greater contribution to economic growth.
“But I expect growth to slow next year as the external sector struggles in the face of a US slowdown. I still expect GDP to grow by 2.5% this year, but I now expect a sharper slowdown next year to just 2%. Even in 2008, further adjustments in the consumer and government sectors are likely to keep growth below trend at 2.5%.
“The weaker outlook for growth is unlikely to stop interest rates from rising further this year, however, as the Monetary Policy Committee remains focused on the risk that above-target inflation will lead to a significant pick-up in inflation expectations and wages growth. But I think that rates are likely to be falling by the second half of next year.“
- ENDS -
Notes to editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte. If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or via email on business@capitaleconomics.com.
This press release contains general information only and is not intended to be comprehensive nor to provide professional advice. It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.
Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.
The information contained in this press release is correct at the time of going to press.
