London may in the coming years lose its rank as the most attractive destination for financial services firms in Europe. A new analysis of the effect of a loss of single market access suggests that London will fall from its top spot to become the second most attractive centre – in terms of economic indicators – losing out to Dublin. The loss of financial services exports, and activity, could see up to 0.4% of UK's GDP evaporate by 2030.
The UK EU referendum in favour of Brexit will, according to a new study from PwC, have an adverse effect on the UK economy – although the extent of the economic loss is not yet known. The professional services firm has, however, revised its estimates for the UK near-term economic growth downwards, from 1.9% and 2.3% respectively in 2016 and 2017 to 1.6% and 0.6% respectively. In a new report, titled ‘Global Economy Watch: What does Brexit mean for London, the UK and Europe?’, The Big Four firm analyses the effect of a (possible) Brexit on the competitiveness of London as Europe’s financials services hub.
Impact on goods and services
The longer term picture is, according to the firm, conditioned by the deal forged between the EU and the UK. Different possible agreements, from EEA membership to World Trade Organisation rules, will impose either no barriers at all or else considerable barriers. While the effects of decisions will affect generations to come, one possible significant loss to the UK will be the status of London as Europe’s financial centre – particularly, according to PwC, if an EEA level agreement is not reached.
The firm notes that the effect of barriers would be the hardest felt by Ireland, whose exports to the UK as a percentage of GDP stand at close to 20% – divided evenly across goods and services. Cyprus too may be considerably impacted, mainly due to tourism services. The Netherlands exports a range of goods to the UK and only limited services. Major EU economies, such as Germany and France are not expecting to be majorly affected by a loss of market access, although specific industries may find themselves in some strife.
Loss to London
One area in which the UK does stand to lose out significantly is its capital as regional financial hub. As it stands, according to PwC’s analysis, the capital is currently the most attractive centre of all major European financial centres. In terms of attractiveness, the capital is in all but one indicator above average. Dublin takes the number two spot, falling behind average in domestic credit to private sector. Luxembourg, Paris and Vienna take the number three, four and five spots respectively. In terms of attractiveness, the firm notes, non-financial factors too play a part – such as quality of life, infrastructure, transport, etc – which are not accounted for in the analysis.
Financial services remain an important part of the UK’s export portfolio. The sector represents more than 20% of all services exports, around 10% behind other business services, and well above the export of transport services. The sector has also enjoyed robust growth in value between 2005 and 2015, averaging CAGR of 7.3%. In total the sector represents 3% of the UK’s GDP.
One of London’s major attractions for financial services firms has been its ‘gateway to the EU’ status. The historical city, with its international flavour, English-speaking primary language, FDI attractiveness as well as history of financial services, among others, have given it the edge over regional counterparts. The loss of passporting, if the EU or the UK decides against single access for the UK, means that one of the primary conditions making London attractive would disappear. The effect, according to the firm’s attractiveness indictor, would mean that London falls to second place, behind Dublin. The loss would be relatively significant, as the capital would move from far out ahead, at around 68 on the index, to around 55 – with Luxembourg and Paris nipping at London’s heels.
The effect of the UK leaving the EU might also mean that non-EU banks, using London as a stepping stone into the wider EU market, might decide to call it quits on the capital. The impact on financial services GVA could, relative to the UK staying in the EU, mean a drop of up to -2% in the mid-term, with up to -3.3% lost in the longer term. In terms of GDP, a loss of -0.4% may be in the pipeline by 2030.
Richard Boxshall, Senior Economist at PwC, comments, “London’s position as an international financial centre is not by any means purely dependent on EU passporting. Other factors such as access to skills and a strong and stable legal system should see it remain as a leading global financial hub in the years ahead. But the potential loss of EU market access poses a challenge for many financial services firms. Business leaders based in London should focus their efforts on lobbying UK Government and EU politicians to retain as much EU access as possible, including retaining EU passporting rights.”