ECONOMIC growth is humming away at an annual rate of nearly 3 per cent, inflation is bang on target and the government’s deficit is falling. But even the sunniest of days often have some clouds. At risk of being damned as a spoilsport, there is a little-noticed fact about our economic recovery I find pretty troubling.
For some time, Britain has been the world’s largest exporter of financial services, bar none. But according to the latest figures from the United Nations Conference on Trade and Development (UNCTAD), we have now been overtaken by the United States.
More troubling still, UNCTAD’s data shows that the UK’s financial services exports have fallen by 20 per cent since their peak seven years ago. Meanwhile, the US’s have continued to grow steadily – with no noticeable slide due the financial crisis.
I appreciate not every reader will be aware that trade in financial services has become quite so important to our economy. In fact, the £34.7bn trade surplus generated from the sector accounts for nearly half of our total services surplus. But there remains a widely held perception that an export isn’t an export unless it’s been repeatedly bashed with a mallet by a man called Herman or if it can only be shifted with a JCB.
Make no mistake, manufacturing is a vital part of our economy. Those who chunter that Britain “doesn’t make anything anymore” should remember that we remain the world’s seventh biggest manufacturer. But between 1992 and 2012, the balance of trade in goods deficit grew by £95bn while the balance of trade in services surplus increased by £65bn. Our trade tigers have changed from workshops and factories to foreign exchange markets, wealth management and the over-the-counter derivatives industry.
Banking is the UK’s biggest export industry, winning business around the globe and bringing it to the UK. The triumph of these industries is not simply that they create thousands and thousands of jobs and pay billions in taxes that fund our schools and hospitals. Crucially, banking exports create massive reserves of foreign currency. These help pay for all our imports of foreign goods – from iPhones to Volkswagens to dolls – without causing a run on the pound or a balance of payments crisis.
This is one of the most compelling successes of our country’s financial services industry and is seldom said. It also explains why I’m concerned that Britain’s financial services exports seem to be declining.
But why is this happening? The US banking system recovered more quickly and was recapitalised more aggressively than on this side of the Atlantic.
It’s also true that our banks have been divesting themselves of their foreign operations and the effects of damaging US regulations have faded. Trends in securitisation have also disadvantaged London over New York. Regulatory uncertainty, fluctuating tax policy and public apathy here in the UK hardly help matters.
These trends matter because, if you remove financial services exports and the closely-aligned professional service exports, our current account deficit would double. That would leave millions of us worse off as goods became more expensive.
The economy is clearly recovering – now we need financial services exports to recover as well.
Anthony Browne is chief executive of the British Bankers’ Association (BBA).