By Fiona Morrill, Financial Services Research Officer in the Economic Development Office
This week we’ve been looking at the ONS’ new data on international trade in financial and insurance services in 2016, which help to shape our understanding of how finance supports the wider UK economy, and the international reach of UK financial services. I’ve looked at the growth in financial and insurance exports over time, and where these exports go to internationally, to get a sense of where the UK’s global links lie.
In this blog post we look at three key concepts in services trade: exports; the services the UK supplies to international markets; imports, the services the UK demands from international markets; and the surplus, or exports less imports, which reflects the net services trade balance. We look at both the combined contribution from financial and insurance services, as both are important within the Square Mile, London and the UK, as well as splitting these out when we start looking at geographical trade patterns, as the two are very distinct.
At the top level, the trade surplus generated by financial and insurance services reached a record high (since records began in 1986) in 2016, forming the biggest contributor to the overall increase in the UK’s services trade surplus.
- Exports – (shown by the green and blue stacked bars below) The UK exported a record high of £79 billion in financial and insurance services in 2016, rising almost £12 billion or 18% on 2015’s total of £67 billion.
- Imports – (shown by the yellow line below) By contrast, imports of financial and insurance services have remained relatively stable, rising to £11 billion in 2016 from £10 billion in 2015.
- These two trends combined mean that the financial and insurance trade balance (shown by the purple line below) has risen to £68 billion, up from £57 billion in 2015, a rise of £11 billion or 20%.
Source: ONS, Pink Book, 2017
Focus on: finance:
Taking financial services trade alone, exports reached £61 billion in 2016, a record high, and an increase of £9 billion or 18% on 2015. Financial services exports are made up of monetary financial institutions’ exports (banks and building societies fees), transactions involving financial instruments (so for example raising equity, issuing debt, and managing risk using financial markets), fund management and financial intermediation including borrowing and lending services. Fund management alone accounted for a £1 billion rise in FS exports, or a quarter of the total increase, demonstrating the increasing importance of the UK as a hub for fund and asset management.
Focus on insurance:
Looking at insurance services, exports reached almost £18 billion in 2016, an increase of almost £3 billion or 19% from 2015. Insurance services exports are made up of freight insurance on imported or exported goods, direct insurance (life, accident, fire, marine and aviation), reinsurance and pensions. The rise in insurance exports was driven by a rise in the ‘other direct insurance’ category, which includes (amongst others) accident and health insurance; marine, aviation and other transport insurance; fire and property insurance, as well as ‘auxiliary insurance services’, including activities of brokers and agencies. The direct insurance services outlined below accounted for £2 billon of the rise, reflecting London and the UK’s status as an insurance hub.
The global reach of financial and insurance services:
Looking at where these services go, the EU remains the UK’s largest trading partner, accounting for 36%, or over 1 in 3, of financial and insurance services exports. The share is slightly down on 2015’s 41%, driven by a drop in insurance exports of £2 billion, somewhat offset by a rise in FS exports of £3 billion. Elsewhere there’s been little major change in terms of finance and insurance export destinations except for Japan, where the UK has increased its exports to £5 billion from £3 billion, and now accounts for 6% of UK exports.
The map below shows the value of UK’s financial and insurance exports to our global trading partners in £millions in 2016, and the % of the UK’s finance and insurance exports these countries account for.
NB. Map shows UK trade with individual countries within the EU. As a single bloc, the EU accounts for almost £29 billion of 36% of UK exports. Map also excludes countries classified as ‘other’ by the ONS, which accounts for £25 billion or 32% of UK exports.
Source: ONS, Pink Book, 2017
The wider benefits of trade
As well as demonstrating the UK’s competitiveness in financial and insurance services, the record highs in finance and insurance exports and trade balance provide wider benefits to the economy, including:
- The UK’s financial and insurance services trade surplus helps to balance the UK’s overall trade deficit, driving the UK’s trade surplus and offsetting more import-intensive activities.
- Access to global marketplace ensures that UK financial firms can benefit from benefits of scale and specialisation, providing jobs and boosting growth. The FS trade surplus reflects the globally competitive and specialised nature of UK financial services, with a leading share of foreign exchange turnover, cross-border bank lending and debt issuance.
- The benefits of efficiency from servicing larger markets means that UK firms and households also benefit from high quality and competitively priced financial services, supporting their growth and expansion.
- Firms that export also tend to be more productive and more innovative meaning they contribute more towards UK economic growth, and are likely to make a higher tax contribution.
The importance of financial services trade to the UK economy and the role of the UK as a global asset and FS hub, underlines the importance of securing access to the UK’s largest trading partner in FS, the EU, as well as the importance of ensuring certainty in our future trade and investment relationships with key global partners, to enable the industry to continue to serve its domestic and global customers.
 ONS, The Pink Book, 2017, https://www.ons.gov.uk/releases/unitedkingdombalanceofpaymentsthepinkbook2017