EY ITEM Club Outlook for Financial Services Spring 2015

Outlook for Financial Services Spring 2015

EY ITEM Club

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The latest outlook for the UK economy is positive. GDP is on the rise, business investment continues at a strong pace, and export performance is expected to improve. But what does this mean for financial services in 2015?

“In global terms, the UK stands to be one of the winners from the recent collapse in global energy prices. This has prompted the EY ITEM Club to raise its GDP growth forecast for 2015 from 2.4% in October 2014 to 2.9% today. However, that doesn’t mean this year will be plain sailing for the UK. Political risk will dominate the outlook for 2015 with the general election in May.”
Chris Price
Managing Partner, UK Financial Services
Read Chris’s forecast overview

Welcome


EY - Chris Price
Chris Price
Managing Partner,
UK Financial
Services

In global terms, the UK stands to be one of the winners from the recent collapse in global energy prices. This has prompted the EY ITEM Club to raise its GDP growth forecast for 2015 from 2.4% in October 2014 to 2.9% today. However, that doesn’t mean this year will be plain sailing for the UK. Political risk will dominate the outlook for 2015 with the general election in May.

Divisive debate on Europe

The first worry is Europe — in terms of both events unfolding in the Eurozone and the risk of the UK’s political parties getting locked into an increasingly polarized debate on UK membership of the European Union (EU). There’s an argument to say that we have precisely the wrong amount of European power and influence at the moment: too little to achieve real EU–wide coordination, but enough to feel like a constraint on national decision–making. With a possible in–out referendum looming, there’s clear scope for the debate on Europe to be highly divisive and damaging to the UK’s position.

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Rebalancing is not reassuring

The second concern is around the “rebalancing” of the UK economy. A shift away from a consumer–led recovery and toward growth driven by exports and manufacturing innovation would be good news for the economy. However, this year’s uptick in growth will continue to be driven largely by consumer spending, which has been boosted by cheap energy.

If the political debate remains focused on reducing dependence on financial services rather than increasing competiveness in other sectors, the effect will be destructive rather than constructive for the economy. It would be more reassuring to hear politicians talking about playing to the UK’s global strengths — of which financial services is arguably one of the most significant.

Under the microscope

The third is the extent to which serious issues such as corporate culture, conduct, tax avoidance and market manipulation become trapped in mounting political rhetoric around the election.  These are difficult issues and would not be well served by being made the subject of electoral sound bites by parties wanting to appear tough on the less positive aspects of corporate behaviour. The UK's reputation as a well governed, well regulated and fair acting international financial centre has been a challenged one over the last few years and it would not be helped by the progress being made on those issues being undermined by political point scoring.

All too visible risks

Outside of the UK election, we can add further macroeconomic and geopolitical worries ranging from the risk of a sharp downturn in China to the rise of European nationalism. There’s also the negative impact of a rock–bottom oil price on innovation in areas like green energy. While the last decade has seen its fair share of uncertainties, they have usually been a consequence of unforeseen shocks. Today, the risks are all too visible, and the odds are that the global economy can’t avoid them all.

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