Rethinking the UK’s Growth Agenda: Why Banking Alone Isn’t Enough

The UK Government’s focus on UK capital markets as a driver for economic growth raises important questions. While banking is a cornerstone of the economy, relying heavily on it risks overlooking opportunities in faster-growing, innovation-driven sectors.

Here’s what bankers are sharing with the government, shaping the direction of their “growth agenda”:

Losing our place as a global leader in capital markets, finance and professional services would be a retrograde step for the whole economy. Gaining global market share can however drive growth for the UK as a whole. – Source: Delivering Over £100bn of New Capital into the UK Economy Every Year Building World-Class Capital Markets Of Tomorrow.

The Banking Sector’s Limitations

Banking typically operates with a low market-to-book ratio, reflecting its reliance on tangible assets like loans and physical infrastructure. While stable, these assets lack the explosive growth potential seen in industries rich in intangible assets, such as intellectual property, technology, and patents.

In contrast, innovation-led sectors—like technology, healthcare, and renewables—dominate global growth indices. For example, 90% of the S&P 500’s market value comes from intangible assets, driving its superior performance compared to the UK’s FTSE 100, which remains tied to traditional industries like banking and energy.

The Challenge: Falling Behind in the Intangibles Era

Since the 2008 Global Financial Crisis (GFC), the UK economy has struggled to regain its footing. While the US has surged ahead, driven by intangible-rich sectors like technology and healthcare, the UK has been held back by underinvestment in innovation and a reliance on traditional industries.

Consider the numbers:

• Equity market growth: Since 2008, UK markets have grown by an average of 2.2% annually, compared to the US’s impressive 8.4%.
• Real wages: Stagnation has left UK workers £10,000 worse off annually compared to pre-GFC trends.
• Productivity: Growth since 2007 has been a modest 5%, while peer nations have far outperformed.

This lack of progress is not due to a lack of capital—long-term investments totalling £6 trillion are held within UK pensions and insurance. Instead, it’s the allocation of this capital that needs a fundamental rethink.

By overinvesting in banking, the UK risks falling behind economies that prioritise high-growth, future-focused sectors.

The Missed Opportunity in Intangible-Driven Growth

Countries that invest in intangible-rich industries consistently achieve better long-term growth. The success of companies like Apple and Microsoft highlights how innovation and intellectual property fuel sustainable economic progress.

Meanwhile, the UK lags in fostering such industries, contributing to the FTSE 100’s underperformance globally. To close the gap, the UK must diversify its investments and embrace sectors with greater transformative potential.

A Better Path Forward

To achieve sustainable growth, the UK should shift its strategy to focus on high-potential industries while maintaining a balanced economic approach. Here’s how:

1. Invest in Innovation:
   Prioritise sectors like artificial intelligence, life sciences, and renewables. These industries not only attract global investor interest but also position the UK as a leader in cutting-edge developments.
2. Support Start-Ups and Scale-Ups:
   Encourage venture capital investment and create an ecosystem where innovative businesses can scale, thrive, and remain listed on UK exchanges.
3. Diversify Economic Focus:
   Reduce overreliance on banking to avoid crowding out resources for sectors with higher growth potential.
4. Enhance Market Attractiveness:
   Offer incentives, proportionate regulations, and support for intangible-driven industries to attract both domestic and international investments.

Why This Matters

Economic growth isn’t just about numbers; it affects all aspects of everyday life:

• Better Jobs and Wages: Thriving industries create high-quality employment opportunities.
• Affordable Housing and Infrastructure: Sustainable growth supports long-term development.
• A Greener Future: Innovation-led sectors drive environmental progress for future generations.

Focusing solely on low-growth sectors like banking risks maintaining the status quo—a path that doesn’t meet the UK’s ambitions for transformative growth.

A Call to Action

The UK has a unique opportunity to redefine its economic future. By embracing innovation, nurturing start-ups, and fostering a more dynamic capital market, we can build a thriving, sustainable economy that works for everyone.

The question we must ask is: Are we investing in the industries that will drive long-term growth and prosperity? The choices we make today will shape the UK’s economic trajectory for decades to come.

Now is the time for policymakers, business leaders, and investors to unite behind a vision of innovation, collaboration, and sustainability. Together, we can ensure that the UK remains competitive and builds a brighter, more inclusive future.