ONE of the effects of the financial downturn has been to highlight to what extent the modern economy is globalised. This has happened in two ways. Firstly, the crisis proved just how interconnected economies are. As if by magic, dodgy mortgages in Arkansas can now cause job-losses in Manila, and deals made in Scottish boardrooms can influence a government’s collapse in Iceland.
Secondly, it has made us realise that no city’s position in the global economic pecking order is secure. London and New York are still the centres of the financial universe, but this is not inevitable. The rumblings around the bonus tax strengthen the suspicion that the foreign nationals who account for 16 per cent of the UK’s financial services workers might easily relocate to some low-tax jurisdiction in the Middle East or one of the growing business hubs in Asia. London’s theatres and restaurants suddenly look like a far less compelling reason to stay.
So what does the future hold for the City? Will we see other cities replace London and New York as the world’s foremost finance centres? The factors which decide whether a city or region is seen as a good place to do business are complicated. Market regulation, taxation, the perception of the government’s attitude to business, time-zone, language, and many other things play a role.
It is hard to crystallise these, but one way could be contained in a survey – “Boom or Gloom” – by international law firm Eversheds, which quizzed 600 senior business decision makers in five financial centres across the world – London, New York, Mumbai, Shanghai and the United Arab Emirates (UAE) – about their confidence in their own location.
BALANCE OF POWER
At first glance, the results suggest that we could be seeing a shift in the balance of power. When asked how confident they are about the economy in their city for the next 12 months, there is a clear difference between those in the old, established centres of the West and the new, up-and-coming ones of the East.
In London, just 2 per cent of respondents said that they feel “very confident” about the next year. In New York, the figure was 10 per cent. This contrasts with 47 per cent in Shanghai, and 45 per cent in Mumbai. The figure for Dubai was 25 per cent, although that was before the Dubai World incident.
London had the lowest level of confidence of any of the five cities, with just 22 per cent saying they are quite or very confident in the economic outlook for the next 12 months. This contrasts with 92 per cent in Mumbai and Shanghai, and 69 per cent in Dubai.
In London, 53 per cent are more confident now than at the start of 2009, and 49 per cent in New York. This compares with 89 per cent of respondents in Mumbai who are more confident now than at the start of the year, a figure that stands at 82 per cent in Shanghai and 53 per cent in Dubai. Just 3 per cent in London believe that the City is performing better than the global economy as a whole, while 56 per cent in Mumbai believe their home city is, and 51 per cent in Shanghai.
Looking to the long-term, 57 per cent of those in London believe that it is only “slightly weaker” than it was before, while in New York, 34 per cent believe that it is “slightly stronger”, and 18 per cent “much stronger”. Hardly a disaster, although the numbers pale in comparison to the 75 per cent in Mumbai and 71 per cent in Shanghai who think that their cities are “much stronger” than before the crisis.
It is also interesting to see that 22 per cent of respondents thought that Shanghai would be the most important financial centre in 10 years’ time, more than the 17 per cent who said it would be London.
Perhaps, though, this is not as bad as it looks for London. Confidence only tells us so much. The reasons for this confidence are at least as relevant. We should remember when reading those high numbers from Mumbai and Shanghai that those in business are not immune to irrational exuberance.
Mumbai’s confidence is largely down to high growth in GDP between April and June while Shanghai’s confidence is influenced by the government stimulating the economy. It is possible that others in these cities see the woes of London and New York as reasons to be cheerful in themselves.
But the global economy is not a zero-sum game. Mumbai’s rise is not necessarily accompanied by London’s fall.
Interestingly, when asked why they were confident about the next 12 months, 27 per cent in London put it down to “signs of growth”, a higher percentage than in any other region. The same number said that business has picked up, and 25 per cent put this down to better economic data. The leading reasons for lower confidence in London were “government leadership”, at 33 per cent. This is a reversible problem.
Absolute negativity about London’s future would be misguided. What the research does show us is that a multi-polar financial world is coming faster than we perhaps thought a couple of years ago. Indeed, firms are ready for this world, and Eversheds itself has recently invested further in its offices in Hong Kong and Shanghai and in the Middle East.
“We are preparing ourselves for the resumption of confidence, which the survey we conducted shows that the respondents believe is coming in the next year or so,” says the law firm’s chairman Alan Jenkins. “I think it was Machiavelli that said every crisis is an opportunity.”
The supposed fight between different financial centres is in fact nothing but a case of handbags at dawn. There will be no knockout blows, and many different cities can flourish. But if it wants a place at the top table in the future it is vital that London is not complacent. One worrying statistic from the report is that when asked what they had learned from the crisis, just 9 per cent of those in London – the lowest of anywhere – said that they would now “plan for the worst and take fewer risks”.
A skewed attitude to risk was one of the drivers of this crisis. London can continue to be a world financial centre, but it will have to get better at understanding the benefits of being risk-averse. As financiers see other cities as serious options, London cannot afford more mistakes. One financial disaster can be written off as an accident, a second would be careless.