Daniel Mahoney writes for CapX on Brexit and the City

CPS head of economic research Daniel Mahoney wrote for CapX on the city and Brexit, which was the feature of the latest CPS economic bulletin, Wednesday 7 September 2016. 

Financial services are of critical importance to Britain. The UK is the largest exporter of financial services worldwide and the industry contributes nearly one-tenth of national output, according to the City of London.

Much attention has been focused on the implications of Brexit for the UK’s financial service sector going forward, and there is no doubt that there will be challenges ahead. Prior to the Brexit vote, it was claimed the UK’s financial services had the most to lose from the UK exiting the European Union. The sector is also showing nerves in relation to the implications of the Brexit negotiations. Just a week ago global banks were pressing Theresa May to strike an interim deal with the European Union before formal Brexit talks begin.

However, despite these fears, most evidence points to a UK financial services sector that will continue to thrive, and to London remaining Europe’s top dog when it comes to financial services. Ernst and Young have recently stated that the strong fundamentals of the sector continue to give reasons for optimism. This is backed up by the latest Markit/CIPS Services survey, which shows financial service activity growth contributing to a Services PMI of 52.9, which is well above the level that indicates expansion.

The resilience of the UK’s financial service sector is due to a variety of natural advantages. A new report today from the Centre for Policy Studies, co-authored by the renowned British venture capitalist Jon Moulton, highlights the fact that the UK is ranked as the second most innovative country in the world.

The paper also notes that the UK’s level of tax competitiveness has also dramatically improved over the past few years, following cuts to headline rates of corporation tax. Furthermore, Britain is Europe’s leader in terms of higher education and in the protection of creditors. These advantages are just some of the pull factors that will continue to attract investment and talent into the UK’s thriving financial services sector.

city boys graph

Source: Global Financial Centres Index (2015)

All eyes are now on the Brexit negotiations. The UK government will undoubtedly need to prioritise the issue of “passporting”, which currently allows UK financial services firms to operate across the European Economic Area. This will be a challenge for the Government, but the UK has a strong hand to play in these negotiations.

London’s status as a global financial centre places it in a good position to negotiate, particularly given that EU businesses will undoubtedly seek to retain access to the UK’s financial services. All too often it is forgotten that the EU would be severely damaged by an acrimonious divorce with the UK. Morgan Stanley has previouslyargued that eurozone GDP would contract by almost as much as British GDP in a “high-stress scenario”. No doubt EU policymakers will have the Greek crisis in the back of their minds, and will be well aware that problems associated with the Italian banking system will be exacerbated if markets lose confidence in the Brexit negotiations.

In short, the UK’s financial services sector remains in good health, and there appears to be little to fear from the Brexit negotiations. Which are both good reasons for optimism.

This article was originally published on CapX

Date Added: Wednesday 7th September 2016