Divergent impacts: Financial and related professional services during the pandemic

We recently published the latest edition of our annual research highlighting the contribution that the UK-based financial and related professional services industry makes to the domestic economy. ‘Key facts about UK-based financial and related professional services’ found that the industry remains the UK’s largest net exporter, and continues to make a significant contribution to GVA, employment and tax revenue.

Inevitable lags in the collection and publication of official data mean that most statistics in our new research don’t capture the pandemic period. But the data available to date do give us an indication of how the industry fared at a macro level over the course of 2020. Our research highlighted Office for National Statistics data showing the contribution of various sectors to the 9.1% GVA contraction in UK GVA last year:

Figure 7 1

The results are intuitive: the only sector whose economic contribution was (marginally) positive in 2020 was public administration and defence. At the other end of the spectrum, accommodation and food service activities made the largest negative contribution—entirely unsurprising given the repeated, mandated halts to this sector’s activity throughout 2020 in response to Covid-19. The contribution to growth of financial services was -0.2 percentage points (in other words, financial services accounted for 0.2 percentage points of the overall 9.1% decline in GVA). Of course, the industry benefited—relative to others like entertainment and hospitality—from not being directly affected by lockdowns and legal restrictions on mobility. It also benefitted from the fact that activity in sectors to which financial services is particularly important were also permitted to continue their activity. Real estate activities is an example of this; residential property transactions were permitted throughout 2020, and moving home was exemption from the stay-at-home orders (although mortgage lending declined by 9.8% to £249.1bn in 2020).

Our analysis of quarterly GVA data for 2020 reveals some interesting trends and sub-sectoral detail. Firstly, the decline in financial services GVA was not a sudden occurrence based on the onset of the pandemic; industry output had in fact declined in year-on-year terms throughout 2019 as well:

 Financial services GVA

Meanwhile, the rebound from the worst of the Covid-19 impact (that is, in the second half of 2020) was driven by the sub-sector ‘Activities auxiliary to financial services and insurance activities’. In contrast to financial services, pension, insurance and reinsurance activities, which continued to decline on an annual basis throughout 2020, auxiliary financial services activities’ GVA rose by 2.3% year on year in Q3 2020 and by 7.5% in Q4. (These auxiliary activities comprise administration of financial markets; security and commodity contracts brokerage; risk and damage evaluation; activity of insurance agents and brokers; and other activities.)

The story for the related professional services sector is quite different. Legal, accounting and management consulting output grew steadily in 2019 and Q1 2020 before plunging by 10.6% year on year in April-June 2020.

Related professional services GVA v2

Looking at the sector in more detail, both the sub-sectors ‘Accounting, bookkeeping and auditing activities; tax consultancy’ and ‘Legal activities’ demonstrated something of a recovery (in relative terms, from a very low baseline) in the second half of 2020: although their GVA growth rates remained negative in both Q3 and Q4, they were markedly less negative than in Q2. In contrast, management consulting output continued to contract by around 14% year on year in both Q3 and Q4 2020, in line with the contraction registered in Q2 and in sharp contrast to the average growth of 4.6% year on year in the four quarters preceding the onset of the pandemic.

The UK’s success with the vaccine rollout offers much-needed hope that the worst effects of the pandemic will soon be behind us. Even as restrictions on output and mobility are gradually eased, there remain too many questions—for example, about the extent to which pent-up demand will be realised, or what the impact on the labour market will be as the government’s support schemes are unwound—to be able to project with any confidence the strength or profile of the economic recovery. And although it will still be some time even before we can analyse the pandemic’s impact on financial and related professional services, the data available to date are an important reminder that the industry is extremely diverse—so much so, that different sectors within the industry have had widely varying responses (in terms of economic activity) to the exogenous shock of 2020.