TheCityUK’s Independent Economists Group will soon be discussing emerging-market financial volatility and the potential impact on the UK’s financial and related professional services industry. I’ll write more on that in due course, but in the meantime, here’s a look at how emerging-market macroeconomic issues affect UK FRPS.
The UK is a domestically-focused economy: consumer spending accounts for around two-thirds of GDP, and trade makes a slightly negative contribution to growth. On the trade side, the £88.7bn surplus in services trade partly offsets the £121.9bn merchandise trade deficit (2015 data), making the overall current-account position more sustainable. Our research has highlighted the importance of financial and related professional services in this regard; it is by far the largest contributor to the services surplus, as this chart shows:
Although emerging-market economic risk—in particular, the possibility of a sharp economic slowdown in China and the spillover effects that would have for the global economy—is foremost in many economists’ minds, the UK’s services exports are relatively insulated at least from the direct consequences if this risk were to materialise. The chart below shows that the orientation of services exports is heavily skewed towards other developed economies, not emerging markets:
The chart shows total services exports, but financial services exports are a significant proportion of the total—about one-fifth. Service exports in 2014 were worth £220bn, and financial services exports totalled nearly £50bn.
The concern on the risk front is those spillover effects—a China-led global downturn would, by definition affect growth in Europe and North America as well, which in turn would likely affect imports of services, including financial services, from the UK. In a nutshell, then, the UK’s exposure to emerging-market risk is indirect rather than direct.
Source: TheCityUK calculations based on Office for National Statistics data