The detailed report, commissioned by the Corporation of London, bullishly predicts that City output will continue to flourish at the present 7% rate and, in addition, that City employment will grow at 1.75% per annum.
Prof Congdon’s forecasts are based ‘on the identification and consideration of long-term changes in the world economy, such as the rapid growth of markets in countries such as China and India, rather than short-term expectations of business growth’.
Congdon, one of the ‘Wise Men’ who advised former Conservative Chancellor Kenneth Clarke, defines the City not by geographical boundaries but as the financial services industry in the UK.
More specifically he differentiates between domestic and international financial services, defining the City as a centre of international finance.
Nevertheless, the majority of jobs created will be within the Square Mile. This has knock-on implications in terms of planning for office construction, transportation, communication and other infrastructure, to support the burgeoning growth he forecasts will happen in the areas of foreign exchanges, derivatives and high-value services such as corporate finance and fund management.
The report relies on historical employment data from the City as well as a survey Congdon conducted of major financial institutions which explored their projected growth estimates for different sectors of business in the coming years.
The most recent reliable figures available on employment in different sectors of City business are from 1995. On the whole, these figures are adequate to base assumptions on, but in certain sectors, such as foreign exchange trading, they do not reflect recent fundamental changes in the financial markets. As a result, some of the growth estimates by sector seem over optimistic, while others appear to be highly conservative. Congdon predicts an annualised growth rate of 3% for employment in FX markets.
Based on 1995 figures, when European cross trading was still a very profitable segment of City business, this would seem to be a reliable estimate.
However, in the last two years foreign exchange trading has shrunk enormously.
As a case in point, Citibank, which once boasted 60 spot dealers in various European locations, now only employs 20 in its one remaining European trading room in London.
Prior to predicting 2% annual employment growth in international banking, Congdon discounted potential European competition, claiming that Continental banks will be hampered by excessive reserve requirements. This is an issue that European regulators are au fait with, and have already acted upon by drastically cutting down reserve requirements in the run-up to the euro.
Congdon seems excessively bearish when he estimates only 2.5% annual employment growth in international securities trading. This is an area that is confidently expected to boom as European investment managers will soon be allowed to invest across-border in both the equity and fixed income markets.
Major City investment banks are already gearing up for this opportunity by moving all European research, trading and sales to London.
This move, which will result in the grouping of all companies by sector, regardless of nationality, will allow research and sales staff to provide broad comparative research throughout Europe. To accomplish this, City investment banks will be expanding their debt and equity research and sales enormously in the coming years.
The report’s prediction for 3% annual employment growth for derivatives, corporate finance and fund management are probably accurate, along with the prediction of 2.3% growth rate for related ‘professional services’.
Congdon sticks by his estimates, even for his long-term projections for growth in the foreign exchange markets. ‘These facilities are highly cyclical,’ he states, ‘and, although I stick by my estimates, I always welcome criticism.’
Genuine long-term forecasts in financial services are exceedingly difficult to arrive at, particularly when to a City dealer ‘long-term’ rarely means more than the end of the week. Factoring in the effect of something as dramatic as emu and its potential impact on various business sectors is even more difficult.
In some aspects the fundamental change in the European financial market has rendered some of the historical data Congdon utilised irrelevant.
Outside of a few wars, nothing so dramatic has happened in European financial markets in the last century and given the critical mass of intellectual capital available in the Square Mile to capitalise upon this opportunity, the City is probably on the verge of another major boom.
However, we may never know because, given the career longevity of most bankers in the City, nobody reading this will be around in 2015 to compare Congdon’s projections with reality anyway.