Brexit crushes financial exports, but an even bigger blow comes for the city
In July 2018, before the UK even left the EU, Brexit leader Jacob Rees-Mogg suggested it could take 50 years to judge whether Brexit was a success or a failure.
So some Brexit supporters were quick to claim victory on the basis of the first official figures for financial services exports for the first quarter.
Brexit fans were right that the Office for National Statistics figures released in July were much better than what the Remain camp would have predicted. Far from plummeting after the end of the transition period, exports of financial services would have increased by 1.4% in the first quarter of 2021 compared to the same period in 2019.
But, as this column pointed out, the figures had to be treated with caution and were subject to revision.
Well, now they have been. And how. The latest estimate from the ONS is that EU exports have not increased at all, but have actually fallen by 18.5% or more than £ 1 billion.
An astonishing change. And it’s getting worse and worse. In the second quarter, exports collapsed 30.6%. Given that financial exports to other countries rose 5.1% in the second quarter, this suggests that the £ 2bn drop in sales to the EU was due to Brexit.
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The ONS says the revised first quarter numbers were due to a lot of the data arriving too late for the initial release. While revisions to services trade figures are common, it is unusual to have one of this magnitude that turns a rise into a fall.
Quarterly figures can be quite volatile, so to mitigate some of the bumps, the UK Trade Policy Observatory at the University of Sussex compared the latest figures with the average for the past three years. This showed that exports of financial services to the EU in the first half of the year were down 24%, with a drop of around 22% in the first quarter and 27% in the second.
As ugly as it sounds, it’s not as dire as some past predictions. In 2018, the Center for European Reform predicted that if the UK leaves the single market, exports of financial services could fall by 59%. But that figure was a forecast of long-term effects. And if there’s one thing we can be pretty sure of, it’s that the blow to UK financial services exports is going to get worse from here as EU regulators try to force more UK activity in the block.
Market access rules
One factor that mitigated the damage of the no-deal Brexit to financial services was the use by UK-based companies of the national market access rules of EU countries. At the start of the year, UK businesses lost the ‘passport’ rights that allowed customers to access across the EU from the UK.
But each EU country has its own national market access rules which are very different. The rules for Ireland and Luxembourg, for example, are much more liberal than for France. You can see it in the latest export figures with UK sales to France in the second quarter down 38% but to Ireland just 12% down and to Luxembourg up almost 9%. %.
Brussels is trying to force all EU countries to adopt stricter rules, but Ireland and Luxembourg are expected to put up strong opposition as openness is a key feature of their financial services model. Some City watchers believe that since Brexit smaller EU countries have been more successful in opposing measures that hurt the UK and are also against their own interests.
The chairman of a large company in the city said there were signs the EU was abandoning its plan to force clearing of all euro-denominated derivatives from the UK to the euro area. This would only benefit the EU country that hosted the netting while everyone else would share the increased risk to the euro area financial system and the higher costs of netting due to fragmentation. “There is nothing in it for other countries,” he said.
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Another straw City optimists could hang on to concerns about the economic importance of falling exports. Although the decline looks very dramatic, some of it will be low-margin activities with few jobs, such as the migration of European equity exchanges from London to Amsterdam. This is reflected in a collapse in UK exports to the Netherlands, which fell by more than £ 1 billion to £ 538million in the second quarter.
The number of financial services jobs that have shifted from the UK to the EU in the wake of Brexit is perhaps a better indicator of the real economic impact, which is still far below many forecasts (the EY’s latest estimate is 7,600). Yet job losses are expected to increase steadily in the coming years as EU regulators tighten the screws.
And one thing is clear. The idea of some Brexit supporters that growth in other markets could quickly offset falling EU exports seems fanciful. Despite a 14% increase in exports to the US, total UK financial services exports in the second quarter fell by almost 10%. It’s hard to see this trend reverse anytime soon.
To contact the author of this story with comments or news, email David Wighton