3.The service economy and the financial sector’s key role in GDP
It is true that the reputation of both UK-based and US finance houses have been seriously affected by recognition of the processes leading up to the crunch, and inadequacies of the regulatory system in managing both the problems in the wholesale market and more general lending behaviour.’
1. The main long term trend in the UK economy has been a shift away from manufacturing towards services. Services in total now make up 75% of the output (GDP) of the UK. In 1975 it was 55%. Manufacturing is down to 13% from 21% since 1986.
2. Within the services sector there has been an increase in the weight of financial and business services. Between 1996 and 2006 business services and financial services together rose from 25% to 34% of GDP. Within the services sector financial services now represent 10% of GDP, up from 6% in 1996. 
3. Net exports of financial services have grown from £3b in 1991 to £23b in 2006 to become the largest part of services exports. The UK is the global leader in the export of financial services, having 24.4% of the total. 
4. London holds the top spot as the world’s most important international financial centre, ahead of New York City. In all segments, including cross border lending, foreign equities turn over, foreign exchange turnover, exchange traded derivatives turnover, over-the-counter derivatives turnover, marine insurance net premium income, international bonds, fund management, hedge funds, private equity and IPO, London holds the largest share.
The London effect
London depends heavily on the success of financial and business services, and the UK depends heavily on London, although Edinburgh, Glasgow, Leeds, Manchester, Birmingham and Bristol are also emerging as important financial centres.
London’s role as a financial hub for world finance is reflected in the weight it has within the UK economy. London has 12% of the UK population but produces 19% of GDP and 15% of UK jobs. London is a net contributor to the UK economy by around £15bn per annum and contributes 18% of all tax revenues.
However the economy of London is heavily dependent on the health of the financial and business services sector. These services make up a third of all jobs in London, while all forms of manufacturing represent only 9%.The rest of London’s jobs are in different forms of support and personal services or in the public sector.
What shape will the financial sector be in after the recession?
The UK economy depended on the growth of financial and business services for its dynamism in the past 10 years. Other sectors of the economy, particularly retail, benefited directly and indirectly from this. The UK government got deeper into debt on the strength of assuming that growth would continue indefinitely (no more boom or bust). Most of the extra jobs created in this period were business or financial services or in the public sector.
This means that a permanent decline in the importance of financial and business services would have a disproportionately hard impact on the UK economy. Bluntly, if growth in this sector goes backwards there is no other sector of the UK economy which could pick up the baton in terms of growth.
The City of London plays a key role in many aspects of international finance.A former Deputy Governor of the Bank of England summed up the City’s position as follows,
London benefits from English as an international language of commerce, and from its time zone, which means the working day overlaps with Asia in the morning and America in the afternoon. London also has well established financial infrastructure and telecommunication networks.Many of those surveyed point to the regulatory and legal environment. This is partly a matter of the regulatory style – the “risk based and proportionate” approach that the Financial Services Authority has adopted based on general principles where possible. It is partly the simplicity of dealing with a single regulator.English law, which is also the basis for financial services law in the United States, prevails here, with the added advantage that practitioners are less likely actually to invoke the legal system. And what has been called the Wimbledonisation of the UK financial markets – the sale of nearly all the British merchant banks and stockbrokers and the dominance of foreign players – gives confidence to prospective market participants that the competitive environment is genuinely open to all comers.London is also a growing centre for Islamic banking. Finally, London may be benefiting frommeasures elsewhere; certainly in the years since the Enron and WorldCom scandals, commentators have suggested that the application of the Sarbanes-Oxley legislation to foreign firms listing in New York may have encouraged some firms to list here instead.But the single most important factor is the first one suggested by economists: London’s comparative advantage lies in its skilled labour and financial know-how both in the financial firms and in the professions which support them.The free movement of labour within the European Union, and relative openness to immigration by those with specific expertise from outside it, has also meant that employers in the financial sector can access the world labour market. And the relative flexibility of the labour market here in the UK compared to others in Europe may also be a factor.That concentration of skilled labour has spurred competition and innovation. We have seen a very striking illustration of this in the last few years with the rapid growth of hedge fund management and private equity firms in London. Many have been established and are staffed by people who acquired their skills and earned their capital at the more established investment banks and fund management firms of the City. Being at the heart of world markets helped them spot the opportunities and assess the competition. Once they struck out on their own, they could draw on a network of former colleagues and contacts for staff, information and expertise.
Some debate about London’s role as a financial sector has begun.At this stage it is too soon to know to what extent the financial sector in London will recover. However in the short to medium term it is contracting and this will have a deleterious impact on the London economy in particular.
 London’s place In The UK economy LSE October 2008
 UK economy, analysis of long-term performance and strategic challenges march 2008 HM Treasury p5
 Globalisation and the Changing UK Economy BERR February 2008 p14
 The UK economy, analysis of long-term performance and strategic challenges march 2008 HM Treasury p47
 Globalisation and the Changing UK Economy BERR February 2008 p16
 London’s place in the UK economy Oxford Economics2007
 London’s place In The UK economy LSE October 2008
 SIR JOHN GIEVE DEPUTY GOVERNOR, BANK OF ENGLAND
The City’s Growth: The Crest of a Wave or Swimming with the Stream?
26 March 2007
 For a fascinating discussion of this in relation to LIBOR see Donald Mackenzie London Review of Books 25 September 2008