A first look at the impact of the pandemic on services trade

Unsurprisingly, exports of services contracted in the first half of this year–but there were some notable exceptions among the sectors, including financial and related professional services.

Our final economic research reports of 2020 both focused on the international aspect of UK-based financial and related professional services. Today we launched the latest edition of our annual research highlighting the UK’s role as the world’s leading international financial and related professional services hub. And in November we published updated analysis of industry exports from the different UK regions and nations, demonstrating that contrary to perceptions, financial services trade is not just about London.

Our ‘Key Facts about the UK as an international financial centre’ report observes that the UK’s largest trading partners are the US and EU member states. Around 34% of the UK’s financial services exports went to the EU in 2019, compared with 30% to the US and 16% to Asia. This led to the EU being the largest contributor to the UK’s overall financial services trade surplus of around £60bn, contributing about a third of the industry’s total trade surplus.

UK financial services exports by major countries 800px

Services trade data are so far only available covering the first half of 2020. The destination of financial services exports remained unchanged in this period compared to 2019—unsurprising, since as I have written previously in this blog, trade in high-value services tends to be relatively ‘sticky’ as it depends more on structural factors than does, for example, trade in goods that are commoditised.

What is somewhat surprising, however, is that financial services exports registered year-on-year growth in the first half of 2020, up by 9.3% to £43bn. Even more surprising is that the growth was not confined to the first quarter of the year, before the Covid-19 pandemic manifested itself in most of the world: financial services exports rose by 8.3% year on year to £21bn in Q2 2020, although they declined by 4.6% quarter on quarter, according to our analysis of data released earlier this month by the Office for National Statistics (ONS). Related professional services exports, too, showed an increase in the first half of this year, rising from £15.3bn in January-June 2019 to £20.5bn in January-June 2020 (although the ONS’s definition of this category is slightly wider than TheCityUK’s, since it includes public relations activity).

This compares to a contraction in services exports overall of 8.2% year on year in the first half of 2020, which was driven by sharp declines in sectors most directly affected by the pandemic and governments’ stringent restrictions to manage it—such as travel services exports, which contracted by more than 50% year on year in the first half of 2020 and by a staggering 71% year on year in April-June 2020. In the second quarter of 2020, only a handful of sectors registered growth in exports compared to both the previous quarter and the previous year: manufacturing services; government services; and some ‘other business services’, namely research and development services and trade-related services.

The data demonstrate the resilience of financial and related professional services trade in the face of an unprecedented global economic shock, and indicate that the industry is likely to continue to provide crucial support to the UK’s overall balance-of-payments position. As this extraordinary year draws to a close and we look with tempered optimism to 2021, let us hope for a robust recovery in demand in markets around the world—for the benefit not only of the UK’s exporting industries, but of our collective socioeconomic wellbeing.