UK exports of insurance and financial services are crucially important, but EU share is falling as growth disappoints

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1 UK exports of insurance and financial services are crucially important, but EU share is falling as growth disappoints Ruth Lea, Chairman of Economists for Britain, February 2015 Main points: The UK trade surplus in insurance and financial services was nearly 60bn in 2013, 3½% of GDP. The surpluses for insurance and financial services were over 20bn and nearly 40bn respectively. The exports of these sectors are crucially important to the economy. Much of the UK s overall strength in these sectors depends, of course, on London s position as a premier global financial centre. Moreover, London s position in many global wholesale financial markets has, if anything, strengthened over the past years, despite concerns that the British decision not to join the euro in the late 1990s would damage the City. The insurance sector s export trade is dominated by non-eu markets of which the US is by far the largest. Trade with the EU in financial services is proportionately more significant. But, taking exports of insurance and financial services together, the EU s share was only about a third in 2013 in terms of both gross and net earnings. The EU share of exports of insurance and financial services has fallen in recent years. The EU share was 35.5% in 2007, rising to 38% in 2010 (reflecting the impact of the financial crisis on exports to the US) but down to 34% in The EU share of financial services alone has been static, to slightly weaker, over the past decade, which is disappointing given the alleged allure of the Single Market but hardly surprising given the weak growth. Going forward, it can be expected that the EU share will continue to fall given the poor growth prospects. Introduction There is no doubt that UK s external trade in financial services is a significant contributor to the economy, which undoubtedly reflects London s position as a premier global financial centre. Moreover, the UK s financial and insurance sectors export about half their total output, making them extraordinarily successful export industries. By contrast, exports make up about 35% of whole economy output (as measured by GVA). 1 1

2 Chart 1a shows the quite remarkable improvement in the financial services surplus from 2003 to 2007, after which the financial crisis curtailed the activities of the financial sector. Exports of financial services to the US were especially badly affected, dropping from over 11bn in 2008 to 9bn in 2009, though they have since recovered well. There was some pick up in the surplus in The insurance sector was not so adversely affected by the financial crisis, and net earnings have been remarkably resilient since The total surplus for insurance and financial services together was nearly 60bn (3½% of GDP) in 2013, doing much to offset the huge visible trade deficit, which was 112.6bn in The surplus on insurance was over 20bn, whilst the surplus on financial services was nearly 40bn. Chart 1b provides the gross earnings data. Chart 1 Trade balance, financial services & insurance ( bn), Financial services Insurance Financial services & insurance Chart 1b Exports in financial services & insurance ( bn), Source: ONS, 2014 Pink Book. Financial services Insurance Financial services & insurance 2

3 The importance of the City of London It is worth noting at this point that London, along with New York, is one of the world s two undisputed global financial centres, well ahead of the Eurozone s two most significant centres Frankfurt and Paris. 3 According to TheCityUK, the UK, as a whole, has the fourth largest banking sector globally, the third largest insurance sector, the second largest fund management industry and the second largest legal services sector. 4 Much of the UK s overall strength depends, of course, on London s position. Moreover, the UK s position in many global wholesale financial markets has, if anything, strengthened over the past years, despite concerns that the British decision not to join the euro in the late 1990s would damage the City. As chart 2 shows London s share of global forex dealing by turnover was 33% (1998), rising to 41% (2013), whilst the share of interest rates OTC (over-the-counter) derivatives turnover increased from 36% (1998) to 49% (2013). Hedge Funds assets have doubled from 9% (2001) to 18% (2013), but the proportion of exchange-traded derivatives has however slipped. Cross-border bank lending has held steady at around just under a fifth of the global total (not shown). Chart 2 UK share (%) of selected global financial markets Forex turnover Interest rates OTC derivatives turnover Hedge Funds assets Exchange-traded derivatives Source: TheCityUK, Key facts about the UK as an international financial centre, June Data are not available for all years. 3

4 Bilateral analysis for 2013 As we have already indicated the surplus in 2013 for insurance was over 20bn whilst the surplus on financial services was nearly 40bn. The UK s insurance industry s overseas trade is dominated by non-eu markets of which the US is by far the largest. As chart 3a shows, the US market accounted for nearly 40% of net earnings, but other significant non-eu markets included Turkey, China, Singapore, South Korea, South Africa and Mexico, as well as those shown in the chart. In contrast EU markets accounted for less than 20% of total net earnings, with Germany being the largest. Trade with the EU in financial services is proportionately more significant, accounting for over 40% of net earnings (chart 3b). But, even so, the US remains by far the largest single market, explaining why the sharp decline in financial services exports to the US around the financial crisis had such an impact on the overall accounts. Taking insurance and financial services together the EU s share of net export earnings was about one third, little more than the US s share of 30% (chart 3c). Chart 3a Net export earnings: insurance ( bn), 2013, EU/total = 3.8/20.4bn (18.6%) France, 0.5 Germany, 0.8 Netherlands, 0.2 Other non-eu, 6.9 Other EU, 2.3 USA, 8.1 Australia, 1 Japan, 0.2 Canada, 0.5 4

5 Chart 3b Net export earnings: financial services ( bn), 2013, EU/total = 16.0/38.1bn (42.0%) Luxg, 1.7 France, 2.8 Australia, 0.5 Japan, 1.7 Canada, 0.6 Other non- EU, 7.5 USA, 9.5 Germany, 2.3 Ireland, 1.6 Italy, 1.1 Netherlands, 2.9 Spain, 1.2 Other EU, 2.4 Switzerland, 1.4 Russia, 0.9 Chart 3c Net export earnings: insurance and financial services ( bn), 2013, EU/total = 19.8/58.5bn (33.8%) Luxg, 1.7 France, 3.1 Germany, 2.9 Australia, 1.5 Japan, 1.9 Canada, 1.1 Other non- EU, 14.3 USA, 17.6 Other EU, 5.1 Ireland, 1.4 Italy, 1.2 Netherlands, 3.1 Spain, 1.3 Russia, 1 Switzerland, 1.3 Source: ONS, Pink Book, 2014 edition, see annex table 1. The EU: a shrinking part of the world economy Trade in insurance and financial services, or more specifically financial services, with the EU is clearly of importance to the British economy. But, apart from our concerns over possible changes to the regulatory and trading regime within the EU, 5-7 we would caveat all analysis of UK-EU trade with the appreciation that the EU is a relatively shrinking part of the world economy. 8 For example, the Fresh Start project reported: 9 5

6 Whilst in 2005 the UK, Germany, France, Spain and Italy accounted for 27% of global banking assets, PriceWaterhouseCoopers projects that in 2050 that will have decreased to 12.5%. PwC also projects that the BRIC countries will see their share leap from the 2005 figure of 7.9% to 32.9% in Such major changes in the global economy will inevitably have implications for the future prospects for UK trade in financial services with the EU. Indeed there are already signs that the EU share of financial services exports is falling (chart 4). The ONS has published bilateral data back to 2004, though there could be problems of consistency between the data for the years and the data for 2007 onwards. 10 The EU share of financial services exports was around 42% in 2004, but it picked up quite sharply in reflecting the fall in exports to the US (afore-mentioned), clearly reducing the non-eu share. But since 2010 the EU s share has fallen away as the US has recovered and by 2013 the EU s share had fallen below 42%. Given the alleged allure of the Single Market in financial services, this can be only regarded as disappointing. 11 Moreover, it can be expected that the EU share of financial services exports will fall. Unlike the financial crisis, which was a dramatic, hopefully one-off, event that should not be repeated in the foreseeable future, the main factor bearing down on exports to the EU, its sheer lack of growth, is expected to persist. This is unsurprising, given that one of the main drivers of export growth, if not the main driver, is growth in export markets. And growth is sadly lacking in the EU. Taking exports of insurance and financial services together, the EU share was 34% in 2004, though this figure should be treated with caution, rising to 35.5% in 2007 (the ONS s latest estimate) and 38% in It had fallen to 34% by The EU share seems to be in secular decline, as with trade in general. 6

7 Chart 4 Exports of financial services & insurance, EU share (% total) Financial services Insurance & FS Sources: PB2014 (Pink Book 2014) for 2012 and 2013, ONS directly ( ), PB2006 (2004), PB2007 (2005), PB2008 (2006). The EU s share of insurance exports has been fairly steady at around 15-18% (see annex table 2, annex chart 1). 7

8 References 1. Ruth Lea, Better GDP data, but the City slips down the financial centres league table, Arbuthnot Banking Group, 28 April GVA = Gross Value Added ONS, UK trade, November 2014, 9 January Z/Yen, Global Financial Centres Index 16 (GFCI16), September 2014, showed that New York was just a point ahead of London in their global rankings. 4. TheCityUK, The key facts about the UK as an international financial centre, June Ruth Lea, The City benefits significantly from EU trade, but challenges lie ahead, Arbuthnot Banking Group, 5 May Business for Britain, EU financial regulation: a report for Business for Britain, June Business for Britain, How EU wholesale financial regulation differs from what the UK would choose for itself, December Ruth Lea, Commonwealth countries have a bright future, Economists for Britain Perspective, November Fresh Start, Options for change, green paper, June Fresh Start is an MP-led (principally Conservative) initiative to examine the options for a new UK-EU relationship. 10. The totals for have been significantly revised since the Pink Books , especially for insurance, but there is no more recent information available for the breakdown between EU and non-eu for these years. The data from 2007 have been completely revised. 11. CityAM, Citi s UK boss James Bardrick: The City won t fall apart on a Brexit but Britain must do more to make EU work, 24 November In answer to a question about a possible Brexit, Bardrick said It would be a less-good outcome, but we can cope if we have to cross borders between the UK and the EU. We d have to make changes to our operating model to reflect some of the increased inefficiencies that being outside the EU would throw up, and there is no doubt that would lead to changes in the way we have to deploy some of our resources, both financial and people. 8

9 Annex Table 1 Trade in insurance & financial services, bn, selected countries, 2013 Insurance Financial services Insurance & financial services Exports Imports Balance Exports Imports Balance Exports Imports Balance EU27: Lux bour 0 [0] g France Germany Ireland 0.1 [0.1] Italy Netherla 0.2 [0.2] nds Spain 0.1 [0.1] Total of above Other EU = = =5.1 Non-EU: Russia 0.1 [0.1] Switzerla nd USA Canada 0.5 [0.5] Japan 0.2 [0.2] Australia 1.0 [1.0] Total of above Other non-eu = = =14.3 World total EU (38.4) (33.8%) (18.3%) (14.3%) (18.6%) (41.3%) (42.0%) (34.0%) (35.0%) Non-EU Source: ONS, UK Balance of Payments yearbook (Pink Book), 2014 edition, October There are rounding errors, shares in brackets. indicates that data might have been disclosive & therefore were omitted. The data for the balances are shown in square brackets to denote the incompleteness of the data. 9

10 Table 2 Exports of insurance & financial services: to EU, non-eu, world ( bn), EU share (%) in brackets Insurance Financial services Insurance & financial services Total EU Non- EU Total EU Non- EU Total EU Non- EU (14.0%) (41.9%) (34.2%) (14.0%) (39.7%) (31.4%) (14.0%) (40.2%) (32.8%) (14.2%) (14.4%) (13.9%) (14.3%) (14.3%) (40.9%) (39.7%) (44.5%) (46.2%) (44.4%) (35.5%) (33.8%) (36.4%) (38.1%) (35.1%) (14.3%) (18.3%) (43.5%) (41.3%) (34.2%) (34.0%) Sources: PB2014 (Pink Book 2014) for 2012 and 2013, ONS direct ( ), PB2006 (2004), PB2007 (2005), PB2008 (2006). Note that the total figures for have been significantly revised since the Pink Books , especially for insurance, but there is no more recent information available for the breakdown between EU and non-eu for We have interpolated the 2005 figure for insurance. Chart 1 Exports in financial services & insurance ( bn), Financial services Financial services & insurance Insurance EU, insurance 10

11 Sources: PB2014 (Pink Book 2014) for 2012 and 2013, ONS direct ( ), PB2006 (2004), PB2007 (2005), PB2008 (2006). 11