Banking was a bubble – but jobs slump has now gone too far

 
Allister Heath

IT is time for the banker-bashers to rejoice – and for the rest of us to count the costs of the bloodbath in the City. There are now just 149,626 approved persons working in financial services, down 12 per cent from a peak of 169,887 in February 2008, according to the Financial Conduct Authority. The last time the numbers were so low was in 2004; and because these headline stats include wealth managers, some insurers and other categories of financiers, they drastically underestimate the collapse in investment banking.

It is clear that there was a bubble in bankers which needed to burst – the City had taken leave of its senses, and was high on cheap central bank money, moral hazard and excessive leverage – but the sharpness of the fall is nevertheless worrying. The loss of 20,000 highly paid and highly taxed financiers – and the tens of thousands of support staff and other people who depended directly and indirectly on them – is a bitter blow to the economy, and a key point that the dumber banker-bashers inevitably forget.

The decline is not merely cyclical: it has also been exacerbated by regulatory over-reaction, tax hikes, the EU’s attack on the industry and a gradual shift in global banking to faster-growing and more sensible environments such as Singapore and Hong Kong.

London still boasts the lion’s share of top bankers – 2,463 earned at least €1m in 2011, 77 per cent of the total across the EU, even though earnings are down substantially (and the number of UK high earners has fallen a little on 2010). It is good for London and the Exchequer that the City still hosts so many higher earners, who spend their money here and pay far more in tax than is usually understood.

Given how few top bankers are based outside London, it is easy to see why folk in Brussels couldn’t care less how the industry is treated (at best) or are happy to torpedo it (at worst). It is in London that the jobs, spending power and tax receipts have diminished – and an increasingly post-industrial UK is also seeing one of its key export industries being decimated.

A prudent, well-managed and competitive financial system without too much leverage and free of government subsidies, implicit or explicit, is a huge asset for any economy. Banks needed drastic reform – but the onslaught has gone too far, as the never-ending decline in numbers of FCA approved persons demonstrates. Let’s hope we eventually see sense, and don’t destroy one of our key industries.

CHINA IN RECESSION
SOME people will believe anything – including, for example, that China’s economy grew by an annualised 7.5 per cent in the second quarter, as claimed by the authorities. Using the UK terminology, that would translate into second quarter growth of 1.9 per cent or so, an excellent performance only slightly weaker than the 2.5 per cent (10 per cent annualised) which used to be the norm.

Yet the official figures are rife with inconsistencies and simply don’t add up. Lombard Street Research’s Diana Choyleva has fearlessly crunched the numbers, and believes that far from growing the Chinese economy actually shrank by 0.2 per cent in the second quarter (down 0.8 per cent or so on an annualised basis), and that at this rate it will contract again in the third, plunging China into a technical recession. This is shocking but all too realistic stuff.

Structurally, the situation is deteriorating: China is sitting on a massive property and credit bubble, and its companies are facing massive headwinds. The corporate sector is being viciously squeezed by surging unit labour costs (increasingly, China is no longer cheap), a stronger renminbi (which makes exports more expensive and imports cheaper), and higher real interest rates caused by falling producer prices. We shall soon find out how China copes with stagnation.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath