Return to growth looks likely

Return to growth looks likely as business and consumer lending picks up

Since the financial crisis, the outlook for the financial services sector has been very weak. Economic output in the sector has tumbled in recent years and on the latest data (for Q2 2013), stands at its lowest level since 2005.  Labour market data also illustrate the decline in activity in the financial services sector.

Employment in the sector in Q2 2013 was some 7.0% lower than at its pre-financial crisis peak. That’s some 85,000 fewer jobs in financial services in the UK.

Trading activity in many markets remains much lower in than before the financial crisis. And the level of merger and acquisition (M&A) activity also remains subdued; the Q2 2013 estimate for the total number of domestic and cross- border merger and acquisition (M&A) transactions involving UK companies was 111, a 42% decrease on the volume recorded in Q2 2012 (191 transactions).

Despite poor performance in recent years, there are tentative signs emerging that the economic situation for the financial services sector has at least bottomed out. The number of formal defaults in the financial services sector has fallen back to levels last seen before 2008, Business lending is likely to pick up as the recovery gains momentum, while government policy measures to support the housing market - in particular Help to Buy - have led to a sharp increase in mortgage market activity. The number of mortgage approvals for house purchase in July 2013 stood 29.9% higher than the same month a year ago, according to Bank of England data. This increase in mortgage lending activity – albeit from a relatively low base - should support a return to growth in the financial services sector.

Britain’s financial services sector is likely to see structurally weaker growth than before the financial crisis, even in the medium-term. Although the 2013 Z/Yen Global Financial Centres Index continues to place London as the most desirable financial centre in the world, questions remain over how this desirability can be maintained as the global economic balance shifts from the West to the East. The survey used to construct the Global Financial Centres Index shows that, while London continues to be well regarded by survey respondents in North America (and respondents in Latin America and the Middle East), London is less well rated by respondents from offshore centres and Asia & Pacific centres. This could pose challenges for London going forward.

Scandals in recent years, such as the Libor rate fixing, PPI, high interest rate hedging and some retail product mis-selling scandals  also continue to have an impact on the reputation of the UK’s - particularly London’s - financial services industry. Combined with ongoing negative rhetoric from politicians regarding the size of bank bonuses, the UK’s relative desirability as a hub of global finance remains fragile. Potential future moves to increase taxes on bank bonuses, while popular with the electorate, risk damaging a sector that remains crucial to the UK economy. Despite the decline in economic output in recent years, the UK’s financial services industry continues to account for approximately 9% of GDP.