s time to start worrying about London’s financial and business services industry. The City is in crisis, with job cuts spiralling out of control. As we report on our front page, City-style jobs – investment banking, securities, corporate finance, trading, research, derivatives and forex, fund management (including hedge funds and private equity), insurance and professional services, including corporate law, accounting and related consulting in the Square Mile, Canary Wharf, West End, Southwark and other clusters – are collapsing at an even faster rate than previously thought.
The number of City-style jobs peaked at 354,134 in 2007; they are now down to just 249,512, according to the Centre for Economics and Business Research (CEBR), and will fall to 237,036 in 2013 and 236,494 in 2014, the lowest since 1993. The number is then set to stagnate, according to the CEBR, whose figures are widely respected. One out of three posts will have been axed since the height of the bubble. The composition of the remaining jobs has also changed, with compliance roles on the rise.
Some, of course, will rejoice. But those with more sense will realise this bloodbath is no mere cyclical retrenchment but something more serious, and that fewer high-paying jobs means reduced tax receipts, a drop in exports and reduced consumer spending. Everybody wants to reform finance to make it more resilient – and more needs to be done to make sure that bailouts and implicit subsidies are banished forever, and crooks jailed – but there is a difference between reform to strengthen the system and wanton destruction.
As the CEBR notes, equity trading is down 20 per cent year on year; international orders for equity trading have collapsed by half; gilts trading is down by a third; currency trading is down 5 per cent – the first fall since 2009; UK M&A activity has fallen by a third during this year and international M&A has fallen even more. Company floats are a rarity and derivatives are down by a fifth this year.
The carnage in the City is also being reflected in the overall UK services sector: yesterday’s purchasing managers index fell to 50.6, a 22-month low. The composite index – which also includes manufacturing and construction – is back below 50, suggesting the economy is contracting again.
There are two reasons for the City’s woes: the first is the state of the economy and the second regulation and tax. Little can be done about the first issue – of course, the City had grown far too bloated during the bubble days. It is good (though sad for staff) that economically unviable activities that were only ever possible thanks to leverage or excessive liquidity have now been liquidated. Banks held too little capital; their assets were insufficiently liquid – tighter capital requirements means that some activities are rightly being chopped. Daft mergers were going ahead, fuelled by cheap credit. Stupid products appeared, including collateralised debt obligations made out of sub-prime loans. All of this is rightly being swept away; tragically, some of the cuts at places like UBS make economic sense.
But in other cases, capital requirements and other forms of regulation have gone too far and activity that ought to be viable is being wrongly culled. The regulatory move away from bonuses and towards higher base pay has hiked fixed costs, which are now having to be slashed; the old system was more flexible in a downturn. We have gone from extreme moral hazard to extreme risk aversion. The former ended in a phenomenal bust; but the latter could cripple London for years to come. We urgently need a more balanced approach.