How could the financial sector affect the economy?
If a recent report by accounting giant PricewaterhouseCoopers (PwC) is to be believed, the financial services sector could add up to 218,000 jobs by 2020 in a welcome boost for the UK economy.
In the report titled, “Where next? Assessing the current and future contribution of the UK Financial Services sector”, PwC’s economists ran an analysis based on two different scenarios to represent potential futures for the financial services sector and the wider economy.
The first scenario combining a robust regulatory regime that facilitates financial services sector growth with economic conditions that are also beneficial to the sector. This situation would increase the gross domestic product (GDP) 2-3% higher by 2020.
In addition, it would add as many as 218,000 more jobs to the economy with 47,000 additional jobs in the financial services sector by 2020.
In the second scenario, in which the sector is constrained by weaker economic conditions as well as a tough regulatory environment, UK GDP could only rise by 0.2% with an additional 12,000 jobs across all industries, according to the report.
“Our analysis suggests that the links between the financial services sector and other sectors across the UK economy are strong,” says Kevin Burrowes, UK financial services leader at PwC. “This shows the important contribution the sector makes to the UK economy across all regions, but also highlights the profound effect that financial services regulation or changes in financial services performance can have on non-financial services business.”
He adds: “A thriving financial services sector is essential to the UK economy. It is important that financial services reforms are balanced against the performance of the sector, and its contribution to the overall UK economy.”
Undoubtedly a robust financial sector is important to the economy: UK businesses spent more than £113bn on financial services in 2010, according to official data. Meanwhile, the sector itself bought more than £90bn worth of goods and services from other companies in 2010, with a strong focus on telecoms, IT, transport and catering.
On top of this, the sector generated in excess of £20bn of activity within itself in 2010 through sub-sectors such as investment banking and brokering.
But look below the surface and it’s not all good news. “It’s great that PwC has predicted that 47,500 jobs will be created within financial services by 2020,” says Hakan Enver, operations director at Morgan McKinley. “But there have been such high levels of redundancy within the industry in recent years; we must not lose sight of the big picture. To put it in perspective, according to reports earlier this year the CBI has estimated that 132,000 jobs have been lost in finance and insurance since the downturn began in 2008. The amount of new roles that are due to be created do not stack up to those that were recently lost.”
That said, Enver says this projected job creation would have a hugely positive effect on the wider UK economy. In London alone, around 12% of tax revenue is generated from the financial services industry. And as such, growth in this area will have a substantial and direct impact on the country’s fiscal health.
“This will create a snowball effect of confidence and growth,” he continues. “As the Government brings in more receipts, market confidence will, in turn, also increase. This will lead to banks investing in diversifying their product base – which will ultimately have a knock on effect on recruitment levels. But on the flip side, while financial institutions diversify, heavy regulation may be a barrier to growth. The recent on-going changes in legislation have been largely reactive. But current regulations will need to be reassessed if banks are to be given the freedom to flourish in coming years.”
Burrowes concludes that the financial services sector has contributed both positively and negatively to the UK’s economic growth in the past ten years. “While the sector has contributed significantly to investment and job creation throughout the country, the financial crisis brought to light many unsustainable practices in banks and providers of financial services that has highlighted the need for better regulation,” he says. “The challenge for policymakers is the provision of effective UK and EU regulation that limits the likelihood and impact of any future crises, while allowing both the financial services sector and the wider economy to prosper.”