City of London Economic Research

How important is UK financial services trade with the EU?

by Saif Ullah, Researcher

 

With London regarded as the world’s leading financial centre, the uncertainty caused by the UK’s recent decision to leave the EU could have major implications on whether the capital can maintain its competitive position in financial services. Some major multinationals, such as Prudential, have already begun to discuss plans to move operations and staff to other centres in Europe in order to maintain access to the Single Market.

The Research team here in the City of London has been looking at the UK’s trade with EU markets to help understand how Brexit has the potential to affect financial services..

 

Goods vs services - EU

 In terms of volume, the UK exports more goods than it does services. Within the EU Germany is by far the UK’s largest trade partner for goods, exporting £60.8bn to the UK in 2014. Other major goods exporters to the UK are the Netherlands (£31.7bn) and France (£25bn).

Approximately 44% of the UK’s total exports both in goods and services went to the EU in 2014 (£229bn out of £515bn), with goods exports to the EU accounting for £148bn (65%) of this amount. However, the UK operates a significant trade deficit with the EU in terms of goods (£79bn), meaning that the UK imports more goods from the EU than it sells.

Source: ONS, Pink Book 2015

In contrast, the UK operates a surplus in its services trade with the EU, meaning that the UK sells more than it buys. Total services exports to the EU were worth £81.3bn in 2014 while imports were worth £64.2bn, leaving a trade surplus of just over £17bn. Germany (£12.1bn), France (£11.7bn) and the Netherlands (£11bn) are the primary markets for UK services exports.

Source: ONS, Pink Book 2015

 

Importance of financial services

Financial services (FS) and insurance make up the largest proportion of the UK’s services trade, accounting for £22.7bn (26%) of services exports to the EU. Once again, it is the larger economies in the EU that are the dominant markets for UK financial services exports, with France (£4.7bn), Netherlands (£3.5bn) and Germany (£3.3bn) being the biggest recipients.

 

Wider markets

The UK also has a number of important trading partners globally. The US imports £21.6bn worth of FS and insurance services from the UK, nearly the same as the total amount of financial services exports to the EU. Other major recipients of UK FS and insurance exports include Japan (£3bn) and Australia (£1.2bn).

Taiwan imported £176m of FS and insurance services from the UK in 2014, £18m more than the previous year, while there was also growth in trade with Japan (up nearly £200m to £3bn) and Indian markets (up £1m to £218m). Although there was a general decline in FS and insurance exports from the UK in 2014, economies such as South Africa (£436m), Singapore (£515m), Hong Kong (£593m) and Saudi Arabia (£342m) have remained major trading partners.

UK’s main FS and insurance export markets outside EU

Countries	Trade in FS and Insurance, 2014 (£m)
USA	21627
Japan	2992
Switzerland	1913
Australia	1151
Russia	1027
Canada	850
Hong Kong	593
Singapore	515
South Africa	436
Saudi Arabia	342

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: ONS, Pink Book 2015

 

Life after Brexit

While EU member states in unison remain the primary market for the UK’s FS and insurance exports, receiving nearly a third (33%) of the total amount exported, the UK has developed strong and growing trade relationships with many countries outside of the EU. The strength of the financial and insurance services cluster in London, the availability of highly skilled staff and the wealth of professional, legal and tech services all underpin the capital’s reputation as a world leading financial centre. If we can maintain these strengths, there is good reason to believe that the UK’s financial services industry can continue to prosper outside of the EU.

The City of London Corporation, and in particular the Economic Development Office will be significantly increasing our investment to support financial services across the UK, reinforcing our strategy and delivery in building future products and services in financial services; promoting exports and investment; strengthening and influencing the wider regulatory framework; and enhancing our partnerships with business and government.

 

 

Clusters in the City and the growth of the technology, media and telecommunications sector

 by Maxine Kennedy

Research Officer at the City of London

 

Last week (10 August 2016) , the City of London's Research team published a set of maps showing firm movements in and out of the City between 2012 and 2014.

Commissioned by the City of London Corporation and undertaken by Trends Business Research using their own unique database, the maps show patterns of firm activity for five sectors: insurance; professional services; finance; technology, media & telecommunications (TMT), and administration & support services.

 

Certain spatial patterns are immediately obvious: The City's insurance firms are tightly clustered in the east – a pattern that dates back hundreds of years. The City's professional services firms are more dispersed, but with a notable cluster in the west. The City's finance firms are clustered in the centre-east. The City’s administration and support service firms have no obvious cluster- which is not surprising, as these firms tend to locate near to their client base rather than near each other. The City’s TMT firms have no obvious cluster, but this could be because the sector is still developing. However there is some evidence of clustering in the west and centre-east of the City.

 

Why cluster?

Clustering continues to be a marked phenomenon  despite modern technology reducing some of the traditional needs for firms to be physically close to one another. Evidence shows that businesses continue to find benefits from, for example, a shared pool of skilled staff and suppliers. In 2013, just over 60% of City firms bought from others based in the City, and almost 70% made sales to other City firms. Research produced by the City of London earlier this year noted that the prestige of already existing firms was a key draw for firms move to the City. Others have found that productivity increases in business clusters. Whilst there is a lot of evidence about how firms cluster on a city scale - for instance, California’s Silicon Valley, the tech clusters around Cambridge University and New York’s financial hub - comparatively less is known about how firms cluster within cities. These maps help to shed light on these patterns.

 

The rise of the TMT sector

TMT is a relatively new sector in the City, and has a comparatively higher churn rate (i.e. more firms starting and closing). Thus the map for this sector shows a lot of activity with some clustering in the west and central-east areas of the City boundary.

Although the City remains predominately a financial and professional services hub (financial services alone accounted 39% of City employment in 2014), the growth of the TMT sector is undeniable. Its workforce has grown 44% since 2010, and the latest figures show that 34,500 people, or 8% of the City’s workforce, is in TMT.

Recent data from JLL states that at 31%, it was the TMT sector that presented the most active demand for City offices in Q2 of this year (2016). Between 2001 and 2010, financial services firms accounted for 29% of office take-up; TMT firms at 10%. However, by the next decade, TMT firms had taken over: 21% of take-up was in the TMT sector and 19% was in the finance sector.  This echoes a larger trend in Central London, where the TMT sector has been the biggest take up of office space over the past five years.

 

      

Source: JLL, Central London Office Market Report, Q2 2016                                                                                                                                                                                 

       

       Source: Knight Frank, Central London Quarterly Q2 2016

 

The future of the TMT cluster

With the TMT sector growing rapidly in the City  - and in London more widely - how might this play out spatially? Taking into account the benefits of clustering , and the  already established tech hub around Old Street on the northern border of the City, will we see this developing sector begin to form a tight cluster within the City boundaries, as the long-established City sectors have? This is something myself and colleagues in the Research team will be keeping a close eye on.

We’ll be updating the maps with the latest data available towards the end of the year, so please check this page, or sign up to our mailing list here to see how these trends evolve.

 

 

 

The implications of Brexit for London – a focus on migration

By Dr Laura Davison

Head of Research at the Economic Development Office, City of London Corporation

 

London’s pre-eminence as a global centre for financial and professional services is underpinned by many long-standing strengths across the physical, political, economic and social infrastructure. Key among these is its global reach – in terms of both access to markets and the ability to attract a skilled workforce from around the world.

Distinctive aspects of London’s economy mean that London will be sensitive to particular implications of Brexit in different ways to other parts of the UK - in particular London’s economic concentration in services and the international nature of its workforce and businesses.

For companies exporting to the EU, and London residents with EU nationalities, the impact will be directly tied to the shape of the Brexit negotiations, for example through restrictions to the free movement of EU nationals and direct access to the rest of the EU’s market of 444 million people. There will also, though, be wider consequences for London’s international residents if visa requirements change as a result, and for those international businesses who locate here because of the EU market access this allows -  for example through financial services passporting.

Census data from 2011 highlights just how international London’s population is – with over a third (37%) of residents born outside the UK, and 10% born in other EU 28 nations – 31% of the UK’s total EU population. In contrast, across the rest of the UK (excluding London), 9% were born overseas and 4% elsewhere in the EU. Recent analysis by the Centre for London[1] highlights the key part that EU workers play in some sectors of London’s economy – in particular in the construction industry and accommodation and food services, where they make up substantial proportions of the workforce.

Yet the FT[2], working with the Oxford Migration Observatory, has highlighted that many such workers would not meet existing visa requirements - potentially as many as 94% employed in hotels and restaurants, and three quarters of EU construction workers.

Other service sectors - such as financial and professional services - also have a much higher proportion of EU workers in London relative to other parts of the UK. In financial services, these are concentrated in particular subsectors and companies; City recruitment firm eFinance[3] carried out an analysis of the nationality and employment of its database of 156,000 workers, where 17% of London’s financial services jobs were filled by EU workers. Investment banking had the highest proportions, while there were also distinct concentrations of nationalities – such as the Polish workforce in accounting.

Large firms are important employers in London - and particularly so for financial services, with the 90 FS firms with 500+ employees accounting for two thirds of London’s financial services employment.[4] Investment banks are some of the biggest, employing thousands in London, and many thousands more across the country. As the EU is such an important market for FS exports - 41%[5] - the shape of the UK’s future relationship with the EU will have a key impact here.

Finally, London also has a highly international student population. London Higher[6] and HESA figures show that London’s 33k EU students make up 9% of the student population, relative to about 5% for the rest of the UK. Some universities have particularly high concentrations - 18% of LSE’s students and 16% of Imperial’s are from the EU. The UK is also one of the largest recipients of EU research funding, receiving an estimated €8.8bn across 2007 – 2013.[7] Non EU countries such as Norway and Switzerland can contribute to and participate in funding programmes (such as Horizon 2020) and student exchanges (such as the Erasmus programme). Participation is contingent on certain criteria, however - as Switzerland is now discovering, with the suspension of its Erasmus and Horizon participation following its migration referendum in 2014.[8] 

While London’s migration patterns are complex, with different nationalities having moved here at different points in time and for different reasons, it is obvious that EU and international workforce, students, residents and visitors play a significant role in London’s economy. The outcome of Brexit negotiations could change the face of the city profoundly.

 

[1] http://centreforlondon.org/wp-content/uploads/2016/06/CFLJ4557_London__EU_short_report_final.pdf

[2] http://www.ft.com/cms/s/2/43645264-12a7-11e6-839f-2922947098f0.html

[3] http://news.efinancialcareers.com/uk-en/187541/anti-eu-immigration-stance-disastrous-city-london/

[4] https://www.gov.uk/government/statistics/business-population-estimates-2015

[5] http://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/compendium/unitedkingdombalanceofpaymentsthepinkbook/2015-10-30

[6] http://www.londonhigher.ac.uk/fileadmin/documents/Publica­tions_2016/LdnHigher_HESAStudents2016.pdf

[7] https://royalsociety.org/~/media/policy/projects/eu-uk-funding/uk-membership-of-eu.pdf

[8] http://www.euractiv.com/section/justice-home-affairs/news/switzerland-gets-first-penalty-for-immigration-vote/