Fiona Morrill, Financial Services Research Officer in the Economic Development Office
This week we’ve been looking at the challenges facing the UK financial services industry, and how to identify and scope out new opportunities for trade in international markets.
As the leading global financial centre, the UK specialises in the provision of financial and insurance services to facilitate lending to households, support investment in businesses, and finance infrastructure investment. In 2015 (the latest available data), the UK exported £68.5 billion in financial and insurance services, more than any other type of service, indicating the strength of its comparative advantage. Looking at internationally comparable statistics on trade in finance and insurance, the UK accounted for a sizeable 21% of total world exports in 2014, according to the World Trade Organisation (WTO). As Maxine’s blog highlighted, firms that export tend to be highly productive and more likely to generate tax revenues, create jobs, and generate long term economic growth.
So how can we help to support these firms, and create new opportunities for start-ups and scale-ups in the UK?
Sizing up the existing market and trade links
At the top-level, the WTO statistics provide us with a useful indication of the scale and growth potential of financial services trade with the UK’s key trading partners. For this analysis, I’ve focussed on financial services only (and all numbers are in million USD). The chart below plots international markets by their annual average growth rate (from 2011 to 2014), and the UK’s share of financial services imports in 2014, with the size of the bubbles indicating the size of the market in terms of total FS imports.
Looking at the data, at either end of the dimensions, Sweden is the highest growth market in terms of financial services import growth, rising by an average of 54% per year from 2011 to 2014 (although it’s worth noting this was from a relatively low base of $599 million USD in 2011, to $1884 million USD), whereas the UK accounts for the highest share of FS imports in Australia, at 41%, however Australia and Sweden are both relatively small markets at $2.0 billion and $1.9 billion in 2014 respectively, whereas Luxembourg and the U.S import $38.7 billion and $19.5 billion respectively.Unfortunately the UK’s share of FS imports isn’t available across all markets, so for example while China imported $4.9 billion in financial services in 2014, and we know that the UK exported around $27 million in financial services to China in 2014 (based on current exchange rates), we can’t directly compare these numbers. This underlines the importance of looking at a range of dimensions to build up a sense of where to focus.
Future economic and demographic change
So as well as sizing up the existing market, we can look at projected economic growth for markets in the future as an indication of their potential. PwC’s report, the World in 2050, provides a handy heat map of where the highest growth is likely to be over the next few decades, as determined by their projections of gross domestic product (GDP) on a purchasing power parity (PPP) basis, that is, adjusted for price level differences. Looking at the map, we can see a continuation of the high-growth trend expected in countries like China, India and Indonesia, with Vietnam, the Philippines and Nigeria expected to move the furthest up the global GDP rankings.
Average annual growth rate, 2016-2050
Since financial and insurance services are fundamentally linked to supporting and facilitating individuals’ borrowing and saving, demographics also play a key role in indicating potential future demand of FS. As well as generating new demand for financial services products at the retail level, demographic change influences business trends, pension provision, insurance needs and government borrowing. PwC also map the UN estimates of average working-age population growth to 2050, with high birth rates contributing to strong population growth in Nigeria, the Philippines in India, while the OECD countries in Europe are projected to see declines in working age populations, with the exception of the UK and France.
Average annual population growth rate, 2016-2050
The barriers to financial services trade
Understanding the potential demand for financial services by looking at economics and demographics is just one piece of the puzzle. We also need to take into account the barriers to the provision of services into these markets, and how UK policymakers can seek to address these, to promote openness in trade, improve efficiency, and support the expansion of productive firms both in those markets and in the UK. Our upcoming report discusses the nature and impact of of trade barriers in financial services, and suggests the top-level goals for trade negotiations with the EU and the rest of the world, as the UK seeks to expand its international influence.
We also need a more in-depth understanding of the other major players in these export markets, both in terms of perceptions and where they currently source their imports from. For example according to the Global Financial Centres Index, Japan, as well as being a leading global financial centre in its own right, is surrounded by both established centres with deep capital markets and a broad range of services on offer. Likewise in Australia, Sydney and Melbourne act as hubs for financial and professional services, whereas hubs in Africa like Johannesburg are less well served by geographically close neighbours.
Adapting the UK’s offer to make the most of international opportunities
As well as using various indicators to inform our initial focus on key export markets, research can also inform how we tailor our offer within those markets. For example, PwC’s 2017 Global FinTech report asked firms about their current engagement with FinTech companies, and how they see that developing over the next three to five years. This provides an indication of where the market for FinTech is likely to develop over the coming years, and how the UK can leverage its existing reputation for innovation to fill those gaps.
Current and expected partnerships per country
Adopting a more forward looking approach to assessing the growth potential internationally will enable us to help the UK’s financial services industry to continue to make a significant contribution to UK growth, and overcome the challenges it faces over the next couple of years.
 Z/Yen, Global Financial Centres Index 21st edition, http://www.longfinance.net/images/gfci/gfci_21.pdf
 PwC, Redrawing the lines: FinTech’s growing influence on Financial Services, https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-global-fintech-report-2017.pdf
 WTO, Trade in Commercial Services, 2016, https://www.wto.org/english/res_e/statis_e/tradeserv_stat_e.htm