THE CITY OF LONDON IN RETREAT: THE EU’S ATTACK ON BRITAIN’S MOST SUCCESSFUL INDUSTRY

Presentation to Bruges Group meeting 24th September 2014, by Professor Tim Congdon CBE

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UK share in world output, %Data taken from International Monetary Fund

database, as at May 2014

The UK share of world output was fairly stable at between 3 1/2% and 4% between the early 1980s and the Great Recession, but is now falling sharply.

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The UK's trade in international business services, mostly located in London and the South-East

Exports

Imports

£b.

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100

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The UK's trade in international business services, mostly located in London and the South-East, but with y-axis

on a logarithmic scale

Exports

Imports

£b.

Is the slowdown cyclical or structural?

International business services in the UK growth pattern, 1991 - 2013

1991 - 2008 2008 - 2013

Exports of international business services 12.7% 2.2%Imports of international business services 12.9% 1.8%

Total exports of goods and services 6.7% 3.3%Total imports of goods and services 7.2% 2.9%

Money GDP 5.3% 2.0%

Calculated from annual data; all numbers are in money terms, they are not in

constant prices. Source: Office for National Statistics

43.5%

34.6%

10.5%

5.6%1.8% 4.0%

Composition of the UK's exports of international business services in 2008

Financial servicesOther business services

Insurance

Computer/information services

Personal, cultural, etc.

Communications

Financial services dominant, with 43.5% of the total

The UK financial sector and the world economy

• Britain was the pioneer of modern industrialism, but – as an offshore island - it is not a natural centre for the location of manufacturing industry.

• High-value-added-per-person services are probably a better specialisation for the UK in the 21st century, and in the late 20th century the UK was the world leader in international financial services.

• However, the UK’s exports of such services are only about 0.1% of world output. Massive scope for growth continues.

The UK financial sector and the world economy

• In 2009 Lord Turner, then chairman of the Financial Services Authority, said that much financial service activity was “socially useless” and the sector was therefore too big. He argued that a contraction of finance could occur without loss to the economy.

• At that time exports of financial services were about 4% of GDP.

• It would be hard to imagine anyone in a position of public trust and responsibility saying anything more inept, inappropriate and destructive.

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Exports account for much of UK financial sector activity

- Figures in £b., current prices

Exports of financial services and insuranceGross value added of 'finance and insurance'

35.4%

42.3%

7.4%

7.3%

2.6%5.0%

Composition of the UK's exports of international business services in 2013

Financial services Other business services

Insurance Computer/information services

Personal, cultural, etc. Communications

A proposal from the European Commission

A proposal from the European Commission

The European Commission is proposing/advocating a change in regulation/tax which would lead to a drop of 75% in a certain kind of financial activity, mostly located in one member state, i.e., the UK.

Is this what the Eurozone’s architects and leaders want?

“…if the Eurozone has a collective interest in anything, it is to stop the City acting as its main financial centre.”

- quote from Wolfgang Munchau, a columnist in the Financial Times, 4th March, 2013

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106.3

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93.3

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Regional output in the UK in 2012 All figures in £b.

London South East

North West East

Scotland South West

West Midlands Yorkshire & Humber

East Midlands Rest of the UK

National output just un-der £1,400 billion

8.1

13.8

25.2

12.9

35.3

60.035.4

16.4

29.8

11.9

14.3

16.0

24.2

The London economy in 2011 - GVA in £ billions

Manufacturing Construction

Wholesale & retail trade Transportation & storage

Information & communication Financial & insurance

Professional, scientific & technical Administrative & support services

Real estate activities Public administration

Education Health, social work

Other activities

London’s position in the UK economy

• London accounts for over 22% of the UK’s output.

• The proportion of UK output accounted for by London has been rising for many years, reflecting the UK’s specialization on international business services, esp. financial services, in a ‘globalizing’ world.

• Output per head in London is well above the UK average.

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Output per employed person, by UK region in 2012

UK average = 100

The dynamics of London’s economy• Output per person in London has been above

the national average for many decades, reflecting the location of senior executives and professional support staff in the capital city.

• International business services the UK’s most obvious specialization in the last 50 or so years.

• Logically, workers move to London from the rest of UK to benefit from higher productivity & incomes. That should over time cause regional equalization of incomes.

The London/UK differential Chart below taken from Lombard Street Research’s

1998 and 2003 reports for the City Corporation

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Output per head in London, with UK average = 100

London/UK differential has continued to widen - or at least it continued to widen until 2008.

The dynamics of London’s economy

• The rise in the output/income differential between London and the rest of the UK is unexpected, as equalization of incomes should be the result of labour mobility in a small nation like the UK.

• Various interpretations: strong underlying growth in demand for international business services so that the adjustment is still incomplete, widening gap in skill levels between workers in London & rest of the UK, planning shortages so that space cannot be provided for all the people who want to move to London, etc.

• How much does London depend on financial services? Some puzzles in its recent prosperity.

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Job growth in London, 1997 - 2013- % annual growth rates, quarterly data

London business service employment

Other London employment

Two major background debates

Should the UK economy be rebalanced from services, especially financial services, towards manufacturing? – The debate about rebalancing

If UK officialdom wants to de-emphasize financial services, how is London to adapt?

– The debate about the re-invention of London