Rays of light in post-Brexit gloom

Rays of light in post-Brexit gloom

UK economic growth is at a five-year low. The Office for National Statistics blamed consumers’ Brexit jitters for a stagnant first quarter, and in February, Mark Carney, governor of the Bank of England (BoE), told MPs that UK household incomes could decline by 5 per cent this year, which is below BoE pre-vote predictions.  

It might seem incongruous that shining through this gloom is increasing confidence for the City’s post-Brexit outlook.  

Commercial property prices in the City are at a post-Brexit vote high, although passenger numbers are dropping at Bank and Monument tube stations, and London City Airport, for the first time since the financial crisis.

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Job losses

A Reuters survey published in March, responded to by 64 banks employing almost 364,000 people in the UK, reported expectations that 5,000 jobs would move from London to the EU by March 2019.  

That figure is half the number of losses the same survey reported six months earlier. As the bulk of the later survey took place before the transition agreement was announced, the picture could be rosier. 

The predicted departing 5,000 jobs are not clustering in a single European hub, but are forecast to fragment to five separate hubs: 2,200 jobs in Paris, 1,470 in Frankfurt, 612 in Dublin, 250 in Amsterdam, with the remainder going to unknown locations. 

Hold that thought.

According to the head of the International Monetary Fund before the referendum, Brexit would be “pretty bad, to very, very bad” . 

BoE raised the possibility of the vote triggering a technical recession. Immediately after the vote, a City UK/Oliver Wyman report estimated that a hard Brexit could cull 31,000 to 35,000 financial services jobs. 

Key Points

  • The UK is the leading global exporter of financial services
  • Fears of an exodus of jobs post-Brexit have diminished
  • The future of the City depends on the success of 'passporting' rights

The UK’s financial services sector is the leading global net exporter of financial services. UK banking sector assets are the largest in Europe. The UK is also one of the largest markets in the world for fund management. 

It is the second largest centre for hedge fund managers after New York, and the most developed private equity market outside the US. It also has a 39 per cent share of over-the-counter derivatives trading globally. Both the UK banking and insurance sectors are the fourth-largest in the world, and the largest in Europe.

That the City has so much to lose is what makes it difficult for any of the five separate and competing European hubs to take a substantial amount of its business away. Were the EU to designate a single city as a competing hub, and pour its resources and efforts into that hub, the challenge would be more formidable, but that hasn’t happened, and the lack of a single credible challenger is helping London.

Regulatory and political actions are restraining push factors from the City. March’s transition agreement was a big step forward, providing that the UK’s de facto membership of the EU now continues until the end of 2020, subject to an agreed withdrawal treaty. 

The BoE and the Financial Conduct Authority (FCA) co-ordinated statement that EU-based financial services firms may continue to use their existing passporting arrangements to access the City during the transition period, with a commitment to temporary extensions for a limited period after withdrawal, if a withdrawal agreement is not ratified, also helps. This puts the leading EU financial institutions in the same position as their US and Japanese equivalents.