Positive pointers for financial markets in 2011

Duncan McKenzie, Head of Research, TheCityUK

The UK economic environment has been overshadowed by the snow-affected preliminary GDP estimate for the fourth quarter of 2010, not to mention scaling back of public expenditure. The full picture for UK growth in Q4 is yet to be revealed, but other recent evidence in the financial sector is more positive:

Business volumes up

The CBI/PwC survey indicated that growth in financial services was sustained in Q4 for the sixth survey in succession with firms expecting growth to be sustained during the first quarter of 2011.

Recovery in employment
Pointers to improvements in the general picture for employment come from three different sources:

• At the national level UK financial services has begun to show an upturn: rising by 17,000 to 1,014,000 in the six months to Q3 having dropped by 93,000 during 2009 to a trough of 997,000 in Q1 2010.
• City job vacancies in London experienced a seasonal decline in the final quarter, but over the year as a whole City vacancies picked up from a low point of 42,000 in 2009 to over 61,000 in 2010. Encouragingly, Morgan McKinley survey found that confidence was improving amongst employers and appetite for hiring was on the rise. A further increase to 80,000 therefore seems to be on the cards for 2011. A peak of 114,000 vacancies was reached in 2007.
• Newly employed FSA approved people saw a 15% rise to 3,901 in Q4 from 3,402 in Q3, the first quarterly rise of any significance since before the recession. 

Growing FSA authorisations of firms
The number of new firms authorised by the FSA has doubled from a low point of 174 to 353 between the fourth quarters of 2009 and 2010. Authorisations are on track to return in the second half of 2011 to average quarterly figure of 460 prevailing before the financial crisis. Growth has included FSA authorisations of foreign companies: these totalled 62 for all of 2009 and reached 49 in the first half of 2010 alone.

Strong trade surplus
While the financial services trade surplus has come down from the heights of £46bn in 2008 and £40bn in 2009, it is likely to have reached £36bn in 2010 – still the largest contributor to the current account of the balance of payments and offsetting close to half the goods deficit of £80bn.

Tightening office market in central London
Despite concerns about the long-term competitiveness of the capital, central London has remained a popular location for firms with office take up rising steadily through 2009. A number of major firms, such as J. P. Morgan and Bloomberg, have made major long-term commitments in 2010. Along with rising demand shortage of new supply has played a part but vacancy rates have nonetheless declined to 7% in the City of London and Docklands by the end of 2010.      

Rising IPOs
Following two years in the doldrums, IPOs at the London Stock Exchange totalled over £10bn in 2010. 

Increase in foreign exchange trading
Forex trading was up in the six months to October with the UK’s global share edging up to just over 37%.

These indicators provide positive pointers for the UK economy as a whole given that the financial sector has a pivotal role in supporting business, people and government in the process of economic recovery.

Follow this link to view TheCityUK City Indicators Bulletin Q1 2011.

Celebrate the birthday of the pound in your pocket

Chris Cummings, CEO, TheCityUK

Today marks the 40th anniversary of the introduction of decimalisation in the UK. We bade a fond farewell to pounds, shillings and pence and entered into a new world where, suddenly, there were 100 pennies in a new pound.

Our political leaders had decided that it was time to respond to change. If we were going to trade more easily with our European neighbours a more modern currency was necessary. We had already dropped the ‘10 Bob Note’, left the Guinea behind, and the notion that the meaning of "I promise to pay the bearer the sum of five pounds" actually was an amount in silver or gold was lost long ago. Recognising that the world was changing, it became necessary to change our currency.

Now, this is not an argument for or against joining the Euro – it is a reflection that when circumstances change so should our response. That when global shifts occur we can hang onto ideas, such as the Gold Standard, or we can move with the times and seek a new basis on which to be profitable.

We all know that the business world is changing. The rise of the Asian Markets becomes clearer everyday – it was only yesterday in fact when the Chinese economy was officially recognised as being the second biggest in the world (having surpassed the UK in 2005). The UK has traditionally enjoyed the prestige and profit of being a world leading financial capital. Indeed, we have been the place where ‘the world comes to do business with the world’. In part because of our imperial heritage and, then, because we were the home of the capital markets.

We developed a range of expertise that saw the growth of ‘the cluster’: the business phenomenon that brought together world class investment bankers, underwriters, lawyers, accountants, actuaries, dealers, indeed every type of financial and professional advisory business needed to launch, grow, buy and sell a business of whatever type. A unique ability clustered within a ‘square mile’ and with a talent pool that was so deep it could be drawn from across the nation. London's success has bred a national asset of a sector – employing over 1m people most of whom are outside the M25.

So it is useful on the day we changed our currency to realise that for future success we may need to modernise other parts of our business and policy thinking too. We live in an increasingly competitive and global world where we cannot rely on past glories. Other nations are building their financial services industries and all are targeting London's cluster to ‘salami slice’ the most juicy parts away. In this global war of attraction the UK is slow to respond – and even slower to act. The game is ours to lose.

Due to the financial crisis we have seen taxes rise, the regulatory approach intensify, and a culture which has celebrated innovation and entrepreneurship weaken. While this is an understandable response, we must not let reaction become retribution. Financial services are a major employer, as is the professional services sector. In fact, between the two they employ almost 1 in 10 of the UK population. At a time of cut backs and savings it is necessary to save every job we can.

The industry has been much reformed since the crisis. The wave of UK, European and global regulation enacted since 2008 must now be implemented and its effects measured before we go further. The UK has led the way in tightening regulatory sanctions against firms and while this has been an understandable response, we cannot continue to act in isolation. These are global issues that must be approached in a coordinated international manner. Not to do so will weaken our ability to compete, endanger jobs, and reduce our nation’s growth prospects.

40 years ago the UK took a brave step to change one of the key things at defines a nation state: its currency. It was a step that harked back to the days of Drake and Raleigh when our nation was built on trade and the desire to find new markets. Today's world offers less obvious adventure, but the need for a global ability to compete has never been greater. It is time to put the nation's interest first again and make sure we can be as competitive as others are determined to be.

www.thecityuk.com

The Rise of the Dragon – China becomes the second largest economy

Stuart Popham, Chairman of TheCityUK

Figures from Japan published this week bow to the inevitable, that China has now overtaken them to become the world’s second largest economy, only behind the US.

The inexorable rise of China has been witnessed for years, overtaking the UK in 2005 and Germany in 2007, China is set to overtake the US as the leading world economy within the next decade.

Although this rise does not reflect a new trend, we can still learn from Japan’s announcement today. Firstly, I recall the huge numbers of friends and colleagues who rushed to learn Japanese in the 80’s and 90’s. Schools proudly added Japanese to their curriculums to ensure the next generation was match fit in anticipation of the endlessly Rising Sun. Yet, ten or twenty years on, it is Chinese that would surely prove the more useful language given the country’s inimitable rise as an economic powerhouse.

This underlines the need for the UK to improve how it anticipates the skills required to thrive in the future and maintain its competitiveness on a global stage. Nowhere is this more critical than in the financial services sector. I fear we think skills that guaranteed the UK’s dominance previously, along with the scale and heritage of our past will translate into future success. This is a worrying and dangerous view when in reality, there is no room for complacency in today’s global economy, characterised by the rise of new economic powers.

The UK must also anticipate, proactively plan and react faster to embrace these new realities. The ONS has today published its Monthly Review of External Trade for December 2010. It tells a very clear story – the US is our number one trading partner with 14.9% of trade exports, yet China lies at 9th with 2.4% of exports. The world’s second largest economy is less of a market for UK skills than Germany, The Irish Republic, Spain and Italy.

I have been going to China four times a year for the last few years, attending business and wider trade delegations like that of the Prime Minister last year. The opportunity for UK skills is breathtaking with support for UK businesses from the likes of the China Britain Business Council providing a valuable platform to showcase these. Today’s trade figures highlight how we are missing developing new markets that could drive jobs and growth in the UK.

I suspect both thoughts are connected – we must develop the skills that our trading partners will value in the future, and we must look to use those skills more globally than ever before.

One other thing I see in the ONS numbers today is that the trade for goods and services combined was in deficit in December by £4.8 billion; while trade in services alone was in surplus to £4.4 billion. With the UK’s strength in areas such as financial services and its reputation for innovation, it is all the more vital that we concentrate on building our reputation for these skills abroad, rather than undermining them at home.

www.thecityuk.com

Playing to the strengths of our cluster advantage

Chris Cummings, CEO, TheCityUK

Last quarter's growth figures were disapointing and point to a slow and bumpy recovery rather than a pleasant glide path back to prosperity.

With the Government looking to save £80bn in the life of this Parliament it is useful to consider the role of the financial services sector, which benefited the Treasury by £50bn in the last year alone.

The sector is a national employer. Over 1m people are employed in financial services, with two-thirds based outside of London. This is a sector of scale. Few other industries employ one in twenty of the working population.

Too often financial services jobs get discussed as being about 'bankers in the City'. The truth is that the sector employs people right across the country. These are people doing valuable work helping people to save for the future, protect their families, and grow their businesses. Every day the industry pays out £173m in pension benefits - that's more than the Government.

The UK benefits from something called 'the cluster'. Over decades, with London as the shop window, the UK has been the place to come and do business. Like the 'tech cluster' in Silicon Valley, a unique gathering of innovative international firms have grown up here. From accountants to solicitors, from actuaries to underwriters, from brokers to reinsurance firms, from financial PR specialists to corporate advisers, London and the whole of the UK has developed a set of skills that is unrivalled. It is often said that it takes 18 different types of firms to enable an organisation to list its shares on the stock exchange – all of these firms and skill sets can be found in abundance across the UK.

It is for this reason that international financial services firms make their homes here. So against this backdrop, should we continue to punish today's financial services sector for the poor lending decisions that contributed to the recession? Public sentiment suggests this topic remains current and that some in society would be happy to see these international firms leave. Oddly, some commentators fail to mention that many of the international firms they pillory didn't actually cost the taxpayer a penny. Indeed, these firms are only based in the UK because it makes business sense to them and the UK has benefited from their decisions: J.P. Morgan is the biggest employer in Dorset, Deutsche Bank employs thousands in Birmingham, Citi is a major employer in Belfast, and the list goes on.

If these jobs were judged a necessary cost to rebalance the economy and the international firms were lost, what would be the cost? A major part of the cluster would be removed and the 'gravity' that holds it together would be weakened.

It's worth noting that apart from the 1m jobs in financial services, the professional services community also makes up another million people. Our advisory and business services sector is so strong because of the rich legacy we've enjoyed – created for the UK by far sighted entrepreneurs and built up over 100 years. We risk losing that heritage within a decade, not by deliberate action but by neglect and misjudgement.

At a time when others are being so welcoming to our financial services and related professional services sector, we should pause and ask why. Why is it that they want the jobs, tax and social contribution that we seem so keen to expel? It would be foolhardy indeed to turn away the very sector that can help the UK recover just at a time when others are trying to capture it. This is a competitive world and we must not lose our competitive advantages – let alone drive them away.

Find out more about TheCityUK at www.thecityuk.com