LONDON — The services industry — everything from banking, architecture, IT, and management consultancy — is arguably the most important part of Britain’s economy because it makes up nearly 80% of GDP.
Services are even a bigger growth area than goods.
For these two reasons Britain’s government should concentrate on securing a decent trade deal after the nation leaves the European Union on March 29, 2019.
We already know that two years is likely not enough time to secure all the deals Britain needs to do before a Brexit.
So if Britain was to concentrate on just some key issues, focusing on a decent deal to safeguard some of the key areas of the services economy, that would probably be the most prudent strategy.
The bank ING pointed on in its latest note to clients, services are just as important, if not more, than goods.
“So far much of the media commentary has been focused on goods, with cars and aircraft attracting plenty of headlines. However, global financial services exports are more than twice the value of vehicle exports,” the report’s authors said.
Services are more important than car manufacturing to Britain’s economy
ING’s comment was not unfair — after all, much of the focus has been on what manufacturers are going to do in the event of Brexit. The public are not aware of just how important services are to the economic health of Britain.
A ComRes poll cited in the Financial Times showed that a majority of people thought services accounts for just 46% of the economy — when in reality it’s near 80%.
Physically tangible industries, such as manufacturing, have taken many of the headlines.
Nissan told MPs at the beginning of the month that the UK car industry needs the government to spend at least £100 million ($US123.6 million) on attracting car-part manufacturers to Britain or risk a “house of cards” collapse in the sector post-Brexit.
Last year Nissan received an alleged “sweetheart deal” from the government, getting private assurances over Brexit that helped convince it to retain a manufacturing base in Sunderland. In February this year,
reports emerged that BMW could move production of its electric Minis out of Britain and to Germany over Brexit fears.
But Britain’s government should be a lot more worried about what is going to happen for the services economy — especially financial services.
According to the Office for National Statistics, Britain exports nearly a quarter of a trillion pounds worth of goods and services to the EU. This chart shows just how much services account for these exports:
The loss of passporting rights following Brexit is one of the biggest fears in the City of London and seems almost a certainty under May’s “hard Brexit” plan.
If the passport is taken away, London could cease to be the most important financial centre in Europe, costing the UK thousands of jobs and billions in revenues. Around 5,500 firms registered in the UK rely on the European Union’s passporting rights for the financial services sector, and they turn over about £9 billion in revenue.
Global investment banks, with banks such as Citigroup, HSBC and JP Morgan signalling job moves to continental Europe from London. This week, Lloyd’s of London said it would open a subsidiary in the heart of the EU, the day after Prime Minister Theresa May began talks to take the UK out of the 28-state trading bloc.
Britain’s government should take heed.
Services are growing, not goods
ING highlighted in its note that services is where the growth has been for the UK economy:
“The value of UK goods exports to the EU has barely changed in 10 years, yet service sector exports have risen 65%. Globally, the UK exports £50bn more in goods than services, but this gap is narrowing rapidly.”
Here is the chart:
“The UK would like a deal that leaves the current situation in place. However, several European governments are opposed. Instead, they want European related financial activities conducted in countries that are directly regulated by the ECB.
“This could see jobs moving from London to the Continent with the UK less able to export financial services. Another downside is that London is Europe’s only global financial centre and if it is weakened too much, other business could go to Asia or the Americas.”
Many banks and professional services firms are already looking at moving. My colleague Thomas Colson also spoke to the CEO of a body which promotes Paris as a leading European financial hub, who said a number of banks will announce plans to move operations from London to continental Europe “within weeks” as part of Brexit contingency plans.
We already know that Britain does not have a lot of time to sort out everything that needs to be sorted before Brexit happens. So concentrating on securing a deal that will directly safeguard the heart of Britain’s economy will be one of the best first steps.
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