Legal services sector forecasts 2017-2025

 
 
Legal services sector forecasts 2017-2025
www.lawsociety.org.uk




Legal services
sector forecasts
2017-2025

August 2018
Legal services sector forecasts 2017-2025




2   The Law Society of England and Wales
August 2018




CONTENTS



SUMMARY OF FORECASTS                                                       4

DETAILS OF FORECASTS                                                       6

Total turnover of the legal services sector                                 6

Housing transactions                                                      11

Net exports of legal services                                             12

Employment in the legal services sector                                   14

Prices of legal services                                                  18

Effects of alternative Brexit outcomes on our forecasts                   19

APPENDIX A: TABLES OF FORECAST FIGURES                                    24

APPENDIX B: FURTHER DETAILS OF THE LEGAL SERVICES SECTOR MODEL            28

REFERENCES/LINKS                                                          34

CONTACT DETAILS FOR FURTHER INFORMATION                                   35




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Legal services sector forecasts 2017-2025




    SUMMARY OF FORECASTS




     UK legal services sector                  2014     2015      2016        2017       2018      2019       2020       2021

     Real turnover                          £27.94bn £28.10bn £28.06bn £28.50bn £29.10bn £29.77bn £30.53bn £31.04bn
     (£bn constant 2010 prices)

     % change                                 -2.2%     0.6%      -0.1%       1.6%       2.1%      2.3%       2.6%       1.7%

     Real net exports                        £3.47bn   £3.86bn   £3.42bn     £3.72bn   £4.14bn    £4.37bn   £4.64bn    £4.82bn
     (£bn constant 2010 prices)

     % change                                  9.8%    11.3%     -11.4%       8.6%      11.5%      5.6%       6.2%       3.9%

     Total employment (number)               326,000   323,000   329,105     320,672   315,390    314,047   314,220    314,094

     % change                                  3.8%     -0.9%     1.9%        -2.6%     -1.6%      -0.4%      0.1%       0.0%

     Total employment                        294,500   293,000   295,605     290,195   286,531    285,865   286,241    286,103
     (full-time equivalents)

     % change                                  1.9%     -0.5%     0.9%        -1.8%     -1.3%      -0.2%      0.1%       0.0%



     Housing transactions                    944,827   939,500   936,022     893,832   862,228    840,000   826,276    786,232
     (E&W)

     % change                                 18.6%     -0.6%     -0.4%       -4.5%     -3.5%      -2.6%     -1.6%       -4.8%


    Source: Law Society Research Unit (16 May 2018)




    • The Law Society’s estimates of the growth in                           exports of legal services, and also the slowdown
      real turnover (the measure of the volume of                            in the housing market affecting conveyancing
      work done by the legal sector) for 2017 to 2020                        work. Real turnover growth in the sector will
      remain relatively buoyant. This is due to increasing                   still be higher than growth in the economy as a
      amounts of work relating to regulatory changes                         whole, with continuing work relating to regulatory
      arising from Brexit, the relative buoyancy of work                     changes after Brexit being a significant factor, but
      for law firms from UK businesses in 2016/17, and                       overall growth in the sector will be significantly
      increased work for non-UK clients following the                        lower than rates seen in the past.
      depreciation of the pound’s exchange rate.
                                                                           • Housing transactions have been slowing down
    • However, in the medium-term we expect real                             significantly since the beginning of 2018, as there
      turnover growth to slow down, due to weaker                            has been little or no increase in people’s real
      performance of the UK economy, slower growth in                        incomes, and while the rate of increase in house




4   The Law Society of England and Wales
August 2018




  prices has fallen in most parts of the UK, prices are   short-term. In our headline forecasts that assume
  still high relative to average incomes. With slower     a soft Brexit, we expect real turnover growth to be
  growth in the UK economy and still little sign of       2.2% per year on average over the period 2019-
  significant pay increases, we therefore expect          2025. But if the final outcome is a harder Brexit
  housing transactions to slow down in the short-         such as a Canada-type free trade agreement, then
  term and remain depressed over the medium-term.         growth over this period could average 1.5% per
                                                          year. A hard Brexit could have significant effects
• Net exports of legal services (mainly work              on employment in the sector, due to lower growth
  undertaken in the UK by UK-based law firms for          and also due to less investment in UK firms leading
  non-UK clients) have increased significantly in the     to lower productivity growth in the sector.
  short-term. However, the benefits of the pound
  exchange rate’s depreciation have now largely
  come through, and with only modest further
  falls in the exchange rate expected we do not
  anticipate further significant boosts to UK exports
  of legal services from this source. Exports of legal
  services have also benefited from the pick up in
  World economic growth. This will continue to some
  extent in the short-term, but in the medium-to-
  long term the IMF expects World economic growth
  to moderate.

• Our headline forecasts assume that there will
  eventually be a relatively soft Brexit. However,
  lower overall economic growth, even in the soft
  Brexit scenario, means that employment in
  the legal services sector is unlikely to show any
  significant increases (despite some additional
  work for the sector due to Brexit). We expect
  total employment in the sector to fall from
  an estimated 323,000 jobs (293,000 full-time
  equivalent jobs) in 2015, to 311,000 jobs (283,000
  full-time equivalent jobs) by 2025. Also, over the
  longer term we continue to expect growth in
  total employment in the sector to be affected by
  the increasing adoption of new technology and
  new working methods. This means that by 2038,
  employment in the sector could be 20% less than
  it would otherwise have been.

• Brexit will have a significant negative effect on
  the sector in the longer term, even though the
  sector is benefiting from extra legal work in the




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Legal services sector forecasts 2017-2025




    DETAILS OF FORECASTS



    The 2018 Law Society Research                             Total turnover of the legal services
    Unit forecasts for the UK legal                           sector
    services are based on May 2018                            Growth in the volume of work undertaken by the
    National Institute of Economic                            legal services sector is expected to pick up slightly in
                                                              2018 to 2.1% in real terms (ie inflation adjusted) and
    and Social Research (NIESR)                               show further modest increases over the next three
    macroeconomic forecasts for the                           years (2.3% in 2019 and 2.6% in 2020). However,
                                                              over the longer term, growth is expected to remain
    UK and April 2018 IMF forecasts                           subdued compared to growth rates seen in the past
    for World economic demand.                                (see Graph 1, page 7).

    These macroeconomic forecasts                             The recent increase in growth and the somewhat
    have been fed into the Law                                higher growth over the next two years is mainly
                                                              due to an increase in demand for legal services
    Society Research Unit’s forecasting                       from businesses, and an increase in exports of
    model to produce our forecasts for                        legal services (ie work done by UK-based offices of
                                                              law firms for non-UK based clients) as the £ has
    turnover, net exports, employment                         depreciated and World economic activity has picked
    and prices in the sector, and our                         up. Turnover will also continue to be boosted by
    forecasts for housing transactions.                       additional regulatory work (for example work to re-
                                                              write contracts arising from the UK leaving the EU).
    Further details of this model are in
    Appendix B.                                               However, growth in demand for legal services from
                                                              individual consumers is likely to have remained slow
    The forecasts here are for the UK legal services sector   over the past year and is unlikely to show substantial
    as a whole (ie combined turnover, net exports and         pick up over the next three years. Total real (ie
    employment of solicitor firms, barrister firms, and       inflation adjusted) turnover of the UK services sector
    other legal services providers) and include estimates     (a proxy for consumer demand) is currently expected
    for recent years (2017 and 2018) where official data      to increase by 2.1% in 2018, 2.3% in 2019, and
    for those years is not yet available.                     2.6% in 2020, following an estimated 1.6% increase
                                                              in 2017.
    The NIESR macroeconomic forecasts are based on
    a relatively soft Brexit outcome. However, given the      In the medium-to-longer term, continuing
    uncertainty around the final Brexit outcome, we have      uncertainty about Brexit, and low UK economic
    also looked at the implications for our forecasts of      growth, mean that demand for legal services from
    two harder Brexit outcomes (see pages 19-23).             both business and individual consumers is likely to
                                                              show only moderate growth. Expansion of the legal
                                                              services sector is likely to continue to be greater than
                                                              in the economy as a whole but is expected to be
                                                              below past rates. We currently expect growth in real
                                                              turnover of the sector to average 2.1% per year over
                                                              the period 2021-2025, compared to 4.6% per year
                                                              over the pre-financial crisis period 2001-2007.




6   The Law Society of England and Wales
August 2018




Graph 1: UK legal services sector – real turnover forecasts (% change per year)
%
 9


 8


 7


 6


 5


 4


 3


 2


 1


 0
     2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

-1


-2


-3


-4


-5


-6


-7


Data             Forecasts

Source: Law Society Research Unit (16 May 2018)




Over half of the work undertaken by law firms is for                   More details of factors determining the two main
business (B2B work), and most of the rest is work for                  elements of demand are contained in Appendix B of
individual consumers (B2C work), including work paid                   this report.
for by Legal Aid but undertaken for consumers.




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Legal services sector forecasts 2017-2025




    Business demand                                            Demand for legal services from business will also be
                                                               affected in the short-term by the need for additional
    The main factor in our forecasting model measuring         regulatory work related to Brexit. Our assumptions
    the demand for legal services from business (B2B           on this additional work are shown in Graph 2. We
    work) is the gross trading profits of non-financial        have assumed that additional work from Brexit will
    companies in the UK. In real terms these profits           steadily increase up to 2019 when the UK formally
    are estimated to have increased by 6% in 2017,             leaves the EU, and then continue to increase in the
    reflecting the relative buoyancy of the UK economy         transition period that is likely to occur in a soft Brexit
    in 2016 and 2017, and the sharp depreciation of the        scenario. Additional Brexit-related work then steadily
    £ exchange rate after the EU referendum increasing         declines in the following years from 2023. Under
    export earnings.                                           these assumptions, the total value of additional
                                                               Brexit-related work that needs to be undertaken by
    The UK economy grew by an estimated 1.9% in 2016           the legal sector is approximately £270m per year on
    and 1.8% in 2017, mainly as consumers maintained           average over the period 2017-2025.
    their spending through increased borrowing and
    by running down their savings. Also, the £ effective
    (trade-weighted) exchange rate fell by 10% in 2016
    and 6% in 2017. This increased export earnings of UK
    companies in £ terms, and has led to an increase in
    the volume of exports in certain sectors as UK goods
    became more price competitive in non-UK markets.

    However, the expected slowdown in the economy
    over the next year, and a slower depreciation of the
    exchange rate, mean that real gross trading profits
    of non-financial business are expected to increase
    by 1.5% in 2018, 1.3% in 2019, and by 1.2% per year
    over the period 2020-2025.

    The financial sector is an important source of
    demand for legal services. However, the UK financial
    sector has shown only a modest recovery since the
    financial crisis and, given the likely effects of Brexit
    on the sector, it is expected to show only moderate
    growth at most over the forecast period. We therefore
    do not expect the sector to be a significant source of
    growth in the demand for legal services.




8   The Law Society of England and Wales
August 2018




Graph 2: Assumptions on increase in regulatory work, contract work etc. due to Brexit
Increase in turnover (£m)
£450m



£400m



£350m



£300m



£250m



£200m



£150m



£100m



 £50m



  £0m
              2017            2018            2019   2020   2021        2022        2023        2024         2025


Source: Law Society Research Unit (16 May 2018)




Consumer demand                                              Growth in total real household disposable income
                                                             has also been revised down in NIESR’s medium-to-
Growth in demand for legal services from individual          longer term forecasts. Low growth in households’
consumers (B2C work) is likely to have remained slow         real incomes is therefore expected to be a major
over the past year and is unlikely to show substantial       constraining factor on demand for legal services from
improvement over the next two years. The limited rise        individual consumers.
in B2C work reflects low income growth of households
and falling housing transactions. In the medium-to-          Unemployment is expected to increase slightly over
longer term, only moderate growth in real incomes of         the forecast period, from 4.1% in 2018 to 4.9% in
households is expected and housing transactions are          2025, and this would be expected to lead to some
expected to remain depressed. As a result, we also           increase in legal work related to social welfare issues.
expect only moderate growth in demand for legal              But any increase in this work is likely to be small
services from individual consumers in the medium-to-         compared to overall turnover of law firms and will
longer term.                                                 only marginally offset the effects of low growth in
                                                             households’ real incomes.
Since our last forecasts (released October 2017),
NIESR has revised down its forecasts of growth in
real incomes of individuals. Their May 2018 forecasts
expect total real household disposable income to
increase by 1.5% in 2018 (compared to 2.3% in their
August 2017 forecasts) and increase by 1.8% in 2019
(compared to 2.7% in their August 2017 forecasts).


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Legal services sector forecasts 2017-2025




        Technical note on ONS turnover measures underpinning Law Society
        forecasts

        The UK Office for National Statistics (ONS) publishes two measures of total turnover in the
        legal services sector: Annual Business Survey (ABS) figures and Index of Services (IoS) figures.
        Our forecasts are based on the ABS figures, as they are more robust given that they are derived
        from a large annual survey, whereas the IoS figures are derived from a smaller monthly survey.
        However, the IoS figures do have the advantage that they give an early indicator of changes
        in turnover. The latest IoS figures suggest that real turnover in the legal services sector did pick
        up in 2017 (see graph below), and particularly towards the end of the year. We suspect that a
        proportion of this pick up is due to additional regulatory work (contract work etc. arising from
        Brexit) as the economic fundamentals do not suggest a pick up in real turnover quite this large.



          ONS Annual Business Survey (ABS) figures vs ONS Index of Services (IoS) figures
          Legal services sector real turnover (% change per year)
          %
          12


          10


           8


           6


           4


           2


           0
                1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

           -2


           -4


           -6


           -8


          -10            ABS data
                         IoS data
          -12            Law Society Research Unit forecasts


          Source: Law Society Research Unit (16 May 2018)




10   The Law Society of England and Wales
August 2018




Housing transactions                                                              The relatively low growth in households’ real incomes
                                                                                  continuing will also mean that house prices are
Some growth in households’ incomes and slower                                     unlikely to show much growth in the medium-term.
increases in house prices, will lead to some                                      The February 2018 NIESR forecasts are for the rate
improvement in people’s ability to purchase homes,                                of increase in prices to be no more than 1% per year
but not enough to prevent the number of housing                                   over the period 2020-2022. However, average UK
transactions falling further in the short-term and                                house prices are not expected to fall significantly
remaining depressed for at least the medium-term.                                 in absolute terms (although prices have fallen in
The total number of housing transactions in England                               certain areas of the UK, notably London), due to the
and Wales fell by an estimated 4.5% in 2017, and                                  continuing lack of supply of housing in many regions.
we expect them to fall by a further 3.5% in 2018 and                              House prices are only likely to fall substantially if UK
2.6% in 2019. As a result, the number of transactions                             economic growth slows significantly more than is
in England and Wales is likely to fall to 840,000 in                              currently expected.
2019, compared to a recent high of 945,000 in 2014.
We currently only expect the number of transactions                               Nevertheless, as a result of some growth in
to begin slowly increasing again from 2023 (see                                   households’ incomes, the ratio of house prices to
Graph 3).                                                                         incomes is expected to fall from an estimated 4.54
                                                                                  in 2017 to 4.43 in 2018 and 4.34 in 2019. However,
Average UK housing prices increased by 4.6% in                                    given improvement in the affordability of housing is
2017, compared to 7.0% in 2016, based on the                                      only modest, the house price to income ratio would
latest ONS figures. Furthermore, the February 2018                                only then be back to its pre-financial crisis level and
NIESR macroeconomic forecasts are for the rate of                                 still significantly higher than the ratios of between
increase in prices to fall to 2.0% in 2018 and 1.2% in                            2.30 and 3.20 seen in the 1990s. Also, interest rates
20191. The UK housing market is therefore weakening                               are expected to gradually increase over the medium-
significantly. This is confirmed by Halifax house                                 term, and this will at least partially offset any modest
price index figures, which shows that the annual                                  improvement in the affordability of housing. We
percentage change in prices had fallen to 2.2% in                                 continue to anticipate the Government’s Help to
April 2018 from 3.8% in April 2017. NIESR attributes                              Buy Equity Loans scheme will end in 2020, and this
some of the slowdown in the rate of increase in                                   is expected to contribute to a further decline in
prices to tax changes, such as additional Stamp                                   transactions, particularly in 2021.
Duty Land Tax on second homes and reduced tax
allowances for buy-to-let purchases, and in London
to uncertainty generated by Brexit. But the main
factor behind the slowdown in the rate of increase
in prices is undoubtedly lower growth in households’
real incomes.




1   We have used the February 2018 NIESR house price forecasts, as we have some concerns about the May 2018 forecasts.



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Legal services sector forecasts 2017-2025




     Graph 3: Housing transactions – number of transactions (England & Wales)
                                                                                                                                       Affordability
     1,400,000                                                                                                                                       6




     1,200,000
                                                                                                                                                     5




     1,000,000
                                                                                                                                                     4



      800,000

                                                                                                                                                     3


      600,000


                                                                                                                                                     2

      400,000



                                                                                                                                                     1
      200,000




            0                                                                                                                                        0
                 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


                     Data
                     Forecasts
                     Affordability (house prices relative to incomes)


     Source: Law Society Research Unit (16 May 2018)




     Net exports of legal services                                                of legal services by UK-based law firms increased by
                                                                                  9% in 2017 and will rise by a further 12% in 2018.
     Net exports of legal services is work undertaken by                          The UK legal services sector has performed very
     the UK offices of law firms for clients based outside of                     well over the longer run in terms of exports, but the
     the UK, minus the small amount of work undertaken                            recent large increases in exports are not expected to
     by non-UK offices of law firms for clients based in the                      continue as the effects of the depreciation of the £
     UK. The majority of legal services exports (over 95%)                        diminish and World economic growth begins to slow
     is undertaken by firms of solicitors, and mainly larger                      down. In the medium-to-longer term, export volumes
     City firms for business clients.                                             are expected to increase by 5-6% per year – below
                                                                                  the long-term trend – but still making a significant
     The volume of net exports of legal services is                               contribution to the UK balance of payments.
     estimated to have increased significantly in 2017
     and is expected to show further significant growth
     in 2018, due to the depreciation of the £ exchange
     rate and the pick up in World economic activity. Our
     current estimate is that the volume of net exports




12   The Law Society of England and Wales
August 2018




Graph 4: UK legal services sector – real net exports (exports minus imports) forecasts
(% change per year)
%
35




30




25




20




15




10




 5




 0
      2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025



 -5




-10




-15


Data            Forecasts


Source: Law Society Research Unit (16 May 2018)



The £ depreciated sharply following the UK’s                            from non-UK offices to UK offices, and firms can
referendum on EU membership, falling against                            often transfer work within a few months. This is in
the euro from €1.38/£ in 2015 to €1.14/£ in 2017,                       contrast to sectors such as manufacturing which use
and against the US dollar from US$1.53/£ in 2015                        a substantial amount of plant and machinery, and
to US$1.29/£ in 2017. This is likely to have had a                      may well need up to a few years to move production.
significant short-term effect on where law firms                        A caveat concerning the amount of work that law
choose to undertake internationally mobile work, as                     firms may have transferred to UK offices is, however,
it means that UK-based offices have cost advantages                     that the recent depreciation of the £ is due to fears
in international markets (ie a depreciation of the £                    that the UK will lose access to important EU markets
means that costs of undertaking work in the UK is                       following Brexit. As a result, we have not incorporated
cheaper in terms of US$ or euros).                                      in our forecasts as large an increase in UK exports
                                                                        as we might have normally seen with such a sharp
Also, because legal services work is relatively labour                  depreciation of the £.
intensive, work can more easily be transferred


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Legal services sector forecasts 2017-2025




     Although the depreciation of the £ is the main                                        full-time equivalent jobs), but then to increase
     factor behind the recent increase in volume of net                                    marginally over the period 2021-2022 to 315,000
     exports of legal services (even bearing in mind                                       jobs (287,000 full-time equivalent jobs – see Graphs
     the circumstances of the depreciation), World                                         4 and 6).
     economic activity has also picked up and, in the
     short-to-medium term, is likely to benefit law firms                                  However, in the longer term, modest growth in
     undertaking work for non-UK clients. The latest IMF                                   the UK economy and the increasing use of labour-
     figures estimate that GDP growth in the advanced                                      saving technology and new working methods in the
     economies increased from 1.7% in 2016 to 2.3%                                         sector, mean that total employment in the sector is
     in 2017, and is expected to rise to 2.5% in 2018.                                     unlikely to grow at the rates we have seen in the past.
     We estimate that almost all the increase in UK                                        Furthermore, over a 20-year time horizon the number
     legal services exports in 2017 was attributable to                                    of jobs in the sector is likely to gradually decline.
     the depreciation of the £ but, conversely, in 2018,                                   Total employment in the sector could fall to 311,000
     approximately three-quarters of the expected                                          jobs in 2025 (283,000 full-time equivalent jobs) and
     increase in exports is likely to be due to the pick up                                294,000 by 2038 (268,000 full-time equivalent jobs).
     in World economic activity2. However, the IMF does
                                                                                           Our expectation for the increasing adoption of
     not expect growth in the advanced economies to be
                                                                                           new technology and new working methods in the
     sustained at the 2018 rate, slowing gradually to 1.5%
                                                                                           sector to result in jobs being replaced is reflected
     by 2023.
                                                                                           in productivity forecasts. We have assumed that
     Economic activity in the advanced economies is more                                   in the long run, productivity growth in the sector
     important for UK legal services exports than activity                                 increases to approximately 2.7% per year, from a
     in emerging economies, but growth in the emerging                                     rate of approximately 1.3% per year seen in the
     economies will still have some positive effects on                                    past (see Graph 7). On this basis we have estimated
     those exports. The latest IMF figures estimate that                                   that by 2038, the total number of jobs in the UK
     GDP growth in emerging economies increased from                                       legal services sector will be approximately 20% less
     4.4% in 2016 to 4.8% in 2017 and is expected to                                       than it would otherwise have been, as a result of
     reach 5.1% by 2019.                                                                   the adoption of new technology. This corresponds
                                                                                           to between 70,000-80,000 fewer jobs in total (or
                                                                                           between 60,000-70,000 full-time equivalent jobs)
     Employment in the legal services                                                      than there would otherwise have been (see Graph 8
                                                                                           and also our October 2017 forecasts report http://
     sector
                                                                                           www.lawsociety.org.uk/support-services/research-
     Total employment in the UK legal services sector fell                                 trends/legal-services-sector-forecasts/).
     in 2015, and we expect further falls in the short-term
     due to below average real turnover growth in the
     sector. However, total employment could increase in
     2020-2022 due to the continuing need for additional
     regulatory work arising from Brexit. We currently
     expect total employment in the sector to fall from
     323,000 jobs in 2015 (equal to 293,000 full-time
     equivalent jobs), to 314,000 jobs in 2019 (286,000


     2   We estimate that if the £ had remained at its 2015 value against the US$ and the euro, then UK exports of legal services would have only increased by 1% in
         2017 (compared to 9% with the actual depreciation that occurred). However, for 2018, our forecast for the increase in exports would have still been for 9% growth
         (compared to 12% with the actual depreciation that occurred), even if the £ had remained at its 2015 value.



14   The Law Society of England and Wales
August 2018




Graph 5: UK legal services sector – forecasts of total employment (% change per year)
%
10




 8




 6




 4




 2




 0
     2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
                                                                                             7 2018
                                                                                                  8 2019
                                                                                                       9 2020 2021 2022 2023
                                                                                                                           3 2024 2025
                                                                                                                                     5




-2




-4




-6


Data            Forecasts


Source: Law Society Research Unit (16 May 2018)




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Legal services sector forecasts 2017-2025




     Graph 6: UK legal services sector – employment forecasts (000s)
     000s
     400




     350




     300




     250




     200




     150




     100




      50




       0
            2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


                Total employment (number)
                Total employment (full-time equivalents)
                Full-time employees employed
                Part-time employees employed
                Other employment (partners, directors, owners, and self-employed)


     Source: Law Society Research Unit (16 May 2018)




     This does not mean that the actual number of jobs                              of new technology and resulting reductions in unit
     will fall by this amount, as a significant proportion                          labour costs of providing services (lowering prices of
     of the jobs lost as a result of the adoption of new                            services to consumers), will also have an offsetting
     technology will be offset by continuing growth in the                          effect. These offsetting factors will help to mitigate
     demand for legal services (albeit that the growth in                           job losses from new technology and new working
     demand will be lower than it has been in the past).                            methods to an extent.
     Also, the increases in productivity from the adoption




16   The Law Society of England and Wales
August 2018




Graph 7: Underlying trend productivity (Index 1990=1)
80



70                                                                                                                                                                    Transition period
                                                                                                                                                                         2017-2026

60



50



40



30



20



10



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                                                                                                                                                                                                                                          2028

                                                                                                                                                                                                                                                 2029

                                                                                                                                                                                                                                                        2030

                                                                                                                                                                                                                                                               2031

                                                                                                                                                                                                                                                                      2032

                                                                                                                                                                                                                                                                             2033

                                                                                                                                                                                                                                                                                    2034

                                                                                                                                                                                                                                                                                           2035

                                                                                                                                                                                                                                                                                                  2036

                                                                                                                                                                                                                                                                                                         2037

                                                                                                                                                                                                                                                                                                                2038
                   Forecasts without increase in underlying trend productivity growth
                   Forecasts with increase in underlying trend productivity growth

Source: Law Society Research Unit (31 May 2018)




Graph 8: Total legal services sector – employment (000s full-time equivalents)
350



300



250



200



150



100



  50



     0
            1998
                   1999
                          2000
                                 2001
                                        2002
                                               2003
                                                      2004
                                                             2005
                                                                    2006
                                                                           2007
                                                                                  2008
                                                                                         2009
                                                                                                2010
                                                                                                       2011
                                                                                                              2012
                                                                                                                     2013
                                                                                                                            2014
                                                                                                                                   2015
                                                                                                                                            2016
                                                                                                                                                    2017
                                                                                                                                                            2018
                                                                                                                                                                    2019
                                                                                                                                                                            2020
                                                                                                                                                                                    2021
                                                                                                                                                                                            2022
                                                                                                                                                                                                    2023
                                                                                                                                                                                                            2024
                                                                                                                                                                                                                    2025
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                                                                                                                                                                                                                                   2027
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                                                                                                                                                                                                                                                               2031
                                                                                                                                                                                                                                                                      2032
                                                                                                                                                                                                                                                                             2033
                                                                                                                                                                                                                                                                                    2034
                                                                                                                                                                                                                                                                                           2035
                                                                                                                                                                                                                                                                                                  2036
                                                                                                                                                                                                                                                                                                         2037
                                                                                                                                                                                                                                                                                                                2038




 -50



-100

                       Forecasts without increase in underlying trend productivity growth
                       Forecasts with increase in underlying trend productivity growth
                       Amount employment lower than it would otherwise have been

Source: Law Society Research Unit (31 May 2018)



                                                                                                                                                                                                                                                                        www.lawsociety.org.uk                          17
Legal services sector forecasts 2017-2025




     Prices of legal services                                                                 The rate of increase in prices of legal services is
                                                                                              expected to remain relatively low over the forecast
     The forecasts also incorporate the effects of changes                                    period, and remain at or below the general rate of
     in the prices of legal services. Firms supplying legal                                   inflation in the economy. The limited price growth
     services appear to mostly set prices as a mark-up                                        reflects more moderate growth in the demand
     on costs (mainly unit labour costs3) and relative                                        for legal services, and in the longer term is due to
     to the general level of inflation in the economy as                                      reductions in the cost of providing services from the
     a whole. Prices are also adjusted slightly upwards                                       adoption of new technology. Price increases could
     or downwards according to whether demand was                                             rise slightly in 2020/2021 due to increasing unit
     previously above or below average, although these                                        labour costs as firms have to take on more staff to
     ‘pressure of demand’ effects on firms do seem to be                                      meet additional demand for legal services arising
     relatively small in the legal services sector. Generally,                                from Brexit. But our central forecasts do not show any
     price effects on the demand for legal services are                                       sharp increase in prices (see Graph 9).
     relatively small, as the demand for legal services
     is mainly a ‘derived demand’ (ie legal services are                                      Our medium-to-longer term forecasts for legal
     purchased as part of another process, be it for                                          services prices continue to assume price increases
     example, a business merger or a consumer issue such                                      will be moderated by increasing competition and
     as divorce or buying a house).                                                           de-regulation in the market. Increasing competition
                                                                                              in the market is also likely to raise the importance
                                                                                              of prices to consumers of legal services. There is
                                                                                              evidence that consumers have become more



     Graph 9: UK legal services sector – prices relative to unit labour costs (% change per year)
     10



      8



      6



      4



      2



      0
          2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


     -2



     -4

               Prices (data)
               Prices (forecasts)
               ULC (data)
               ULC (forecasts)

     Source: Law Society Research Unit (16 May 2018)


     3    Unit labour costs are defined as total employment costs divided by the total volume of turnover. They can therefore be thought of as ‘total staff costs per hour of
          work undertaken’.



18   The Law Society of England and Wales
August 2018




sensitive to price changes over the past three to four                                  c) no significant decrease in productivity growth
years (approximately the period since LASPO), and                                          in the UK as a result of Brexit (although NIESR
we continue to assume that consumers will become                                           acknowledges that in the longer term productivity
more sensitive to prices over the forecast period.                                         growth could be affected)

                                                                                        d) (in line with the Office for Budget Responsibility’s
Effects of alternative Brexit                                                              assumptions) that the UK continues to make
                                                                                           contributions to the EU budget as if it were a full
outcomes on our forecasts
                                                                                           member of the EU.
Our main forecasts for the UK legal services sector
                                                                                        The two alternative hard Brexit macroeconomic
are based on NIESR macroeconomic forecasts for
                                                                                        scenarios we have looked at are those recently
the UK economy, which assume that the eventual
                                                                                        produced by Oxford Economics for Thomson Reuters4:
outcome of the UK’s negotiations to leave the EU will
be a relatively soft Brexit. There is however (as NIESR
                                                                                        • a scenario in which the UK adopts a Canada-type
also acknowledges) significant uncertainty around
                                                                                          free-trade agreement (FTA) with the EU
this assumption about Brexit. The Law Society
Research Unit has therefore looked at the effects of                                    • a scenario in which the UK fails to reach a final
two alternative hard Brexit outcomes on our forecasts                                     deal with the EU (a ‘no deal’ scenario) and falls
for the UK legal services sector.                                                         back on World Trade Organisation (WTO) rules for
                                                                                          international trade.
The NIESR Brexit assumptions are based on the
Phase 1 draft legal agreement published by the EU                                       These macroeconomic scenarios have been fed into
and UK negotiators in March 2018. On this basis,                                        the Law Society Research Unit’s model for the UK
NIESR assumes that a soft Brexit will entail:                                           legal services sector to produce alternative forecasts
                                                                                        for the sector.
a) ‘the UK maintains a close but not frictionless
   trading relationship with the EU’                                                    Graph 10 shows our forecasts for real turnover in the
                                                                                        UK legal services sector under the:
b) a transition period of 21 months after the UK
   leaves the EU in March 2019                                                          1) NIESR soft Brexit macroeconomic scenario (our
                                                                                           main forecasts for the sector)

                                                                                        2) Oxford Economics FTA scenario

                                                                                        3) Oxford Economics WTO scenario




4   More details of the Oxford Economics FTA and WTO macroeconomic scenarios are contained in their forthcoming report for Thomson Reuters ‘The Outlook for
    the UK’s Legal Services Sector – Helping to understand the implications of Brexit’. This report includes an assessment by Oxford Economics of the effects of their
    Brexit scenarios on the sector, results from an online survey on the potential effects of Brexit, and results from face-to-face interviews with a number of firms on
    the potential effects. The Law Society Research Unit and the Law Society Relationship Management Team have provided advice and assistance in producing the
    Thomson Reuters report, although Thomson Reuters and Oxford Economics are responsible for the final report. We have used the FTA and WTO macroeconomic
    scenarios from the report with permission of Thomson Reuters/Oxford Economics.



                                                                                                                                               www.lawsociety.org.uk       19
Legal services sector forecasts 2017-2025




     Graph 10: UK legal services sector – effects of different Brexit scenarios
     Forecasts of real turnover (% change per year)
      %
       3



      2.5



       2



      1.5



       1



      0.5



       0
               2014         2015        2016        2017   2018   2019    2020     2021     2022     2023     2024     2025


     -0.5



       -1



     -1.5



       -2



     -2.5



       -3

            Law Society Research Unit model used
            Macroeconomic forecasts fed into model:

                 NIESR soft Brexit scenario
                 Oxford Economics FTA scenario
                 Oxford Economics WTO scenario
                 ONS data


     Source: Law Society Research Unit (20 June 2018)




     Under the WTO scenario, growth is particularly                      and WTO scenarios is lower than in the soft Brexit
     affected by the likelihood of shock downward                        scenario despite those hard scenarios assuming more
     reduction in the UK’s exports from 2019 and, in                     regulatory and contract related work arising from
     this scenario, on average, real turnover in the legal               Brexit. This additional work is also responsible for the
     services sector increases by only 1.1% per year                     marginally higher growth rate in 2018 under the FTA
     over the period 2018-2025. Growth under the FTA                     and WTO scenarios.




20   The Law Society of England and Wales
August 2018




The forecasts for employment in the sector in the two                                     Graph 11 shows how much total employment in the
hard Brexit scenarios are somewhat more uncertain,                                        sector would be lower in the two hard Brexit scenarios
as the effects on employment are dependent on how                                         compared to what it would be in the soft Brexit
a hard Brexit affects (underlying) productivity growth                                    scenario – assuming that the hard Brexit scenarios
in the UK legal services sector5.                                                         have no effect on productivity growth. Under these
                                                                                          assumptions, total employment is substantially lower
The Oxford Economics FTA and WTO scenarios                                                in the two hard Brexit scenarios compared to the
assume that a hard Brexit has no effect on                                                NIESR soft Brexit scenario.
productivity growth in the sector.



Graph 11: UK legal services sector – effects of different Brexit scenarios – no decrease in
productivity growth in FTA and WTO scenarios
Decrease in total employment (number of full-time equivalent jobs) compared to NIESR soft
Brexit scenario
    4,000



                 2014         2015         2016         2017         2018          2019         2020         2021         2022         2023          2024         2025
        0




    -4,000




    -8,000




-12,000




-16,000




-20,000




-24,000


             Law Society Research Unit model used
             Macroeconomic forecasts fed into model:

                   Oxford Economics FTA scenario

                   Oxford Economics WTO scenario



Source: Law Society Research Unit (20 June 2018)




5     Productivity growth does also have an effect on demand for legal services (real turnover) in our model, through its effects on unit costs and prices. However, price
      effects in the legal services market are relatively weak, and therefore demand for legal services is not affected significantly.



                                                                                                                                                 www.lawsociety.org.uk       21
Legal services sector forecasts 2017-2025




     However, there is a significant risk over the longer                                    If a hard Brexit has a significant effect on
     term that less investment, less competition with non-                                   productivity growth, by 2025 total employment in
     UK firms, and less access to skilled staff from other                                   the sector (in terms of number of full-time equivalent
     EU countries, could lead to lower productivity growth.                                  jobs) is 4,000 (1.5%) less than in the soft Brexit
     This would mean that, although real turnover growth                                     scenario (based on the FTA case). But if there is
     would be lower in the two hard Brexit scenarios,                                        a ‘no-deal’ Brexit followed by WTO rules, the total
     firms would no longer be benefiting as much from                                        employment is 10,000 (3.5%) less than in the soft
     productivity increases. The difference in employment                                    Brexit scenario in 2025.
     between the two hard Brexit scenarios and the soft
     Brexit scenario would be smaller as a result.                                           However, this does not mean that lower productivity
                                                                                             growth is beneficial for the sector, as it will have other
     Graph 12 shows, compared with the soft Brexit                                           significant negative repercussions on firms. Lower
     scenario, how much lower total employment in the                                        productivity growth will mean that unit costs will
     sector would be in the two hard Brexit scenarios,                                       rise faster and, although some of these higher costs
     assuming reduced productivity growth. It is assumed                                     will be passed on in terms of higher charges, profit
     that in the WTO scenario, productivity growth                                           margins and amounts available for salary increases
     reduces more than in the FTA scenario6. Under these                                     are likely to be significantly lower. Also, in the longer
     assumptions, total employment is still significantly                                    term, higher costs are likely to affect the international
     lower in the two hard Brexit scenarios compared to                                      competitiveness of UK-based law firms.
     the NIESR soft Brexit scenario, but by somewhat
     less than in the ‘no effects on productivity growth’
     situation.




     6   In our central soft Brexit scenario we assume that in the long run, productivity growth in the sector increases to approximately 2.7% per year as a result of new
         investment, from its previous rate of approximately 1.3% per year. In the simulations where a hard Brexit has a significant effect on productivity growth, in the FTA
         scenario we assume it increases to only 2.0% per year in the long run, and in the WTO scenario we assume it increases to only 1.7% per year in long run.



22   The Law Society of England and Wales
August 2018




Graph 12: UK legal services sector – effects of different Brexit scenarios – with decrease in
productivity growth in FTA and WTO scenarios
Decrease in total employment (number of full-time equivalent jobs) compared to NIESR soft
Brexit scenario
  4,000



             2014         2015        2016         2017   2018   2019   2020   2021   2022   2023     2024      2025
      0




 -4,000




 -8,000




-12,000




-16,000




-20,000




-24,000


          Law Society Research Unit model used
          Macroeconomic forecasts fed into model:

                Oxford Economics FTA scenario

                Oxford Economics WTO scenario


Source: Law Society Research Unit (20 June 2018)




                                                                                                    www.lawsociety.org.uk   23
Legal services sector forecasts 2017-2025




     APPENDIX A:
     TABLES OF FORECAST FIGURES


     UK legal services sector – real turnover                       UK legal services sector – housing transactions
     forecasts                                                      forecasts
      Years                  £m constant               % change      Years Number                      % change
     		                      2010 prices               per year     			                                per year
            2000                 20575                   3.8             2000         1111404             -5.6
            2001                 22224                   8.0             2001         1226922             10.4
            2002                 22561                   1.5             2002         1329753              8.4
            2003                 23247                   3.0             2003         1236738             -7.0
            2004                 24030                   3.4             2004         1249639              1.0
            2005                 24845                   3.4             2005         1044991            -16.4
            2006                 26418                   6.3             2006         1308139             25.2
            2007                 28250                   6.9             2007         1255348             -4.0
            2008                 26393                   -6.6            2008           638164           -49.2
            2009                 25108                   -4.9            2009           617370            -3.3
            2010                 25463                   1.4             2010           656975             6.4
            2011                 26701                   4.9             2011           655612            -0.2
            2012                 26850                   0.6             2012           664916             1.4
            2013                 28582                   6.5             2013           796679            19.8
            2014                 27940                   -2.2            2014           944827            18.6
            2015                 28098                   0.6             2015           939500            -0.6
            2016                 28063                   -0.1            2016           936022            -0.4
            2017                 28502                   1.6             2017           893832            -4.5
            2018                 29098                   2.1             2018           862228            -3.5
            2019                 29770                   2.3             2019           840000            -2.6
            2020                 30530                   2.6             2020           826276            -1.6
            2021                 31040                   1.7             2021           786232            -4.8
            2022                 31777                   2.4             2022           784352            -0.2
            2023                 32460                   2.1             2023           789245             0.6
            2024                 33128                   2.1             2024           793828             0.6
            2025                 33826                   2.1             2025           798118             0.5


     5-year periods            Average              Average %       5-year periods     Average         Average %
     		                      per year over        change per year   		               per year over   change per year
     		                         period              over period     		                  period         over period
        1996-2000                18655                   5.5          1996-2000       1070544              7.2
        2001-2005                23381                   3.8          2001-2005       1217609             -1.2
        2006-2010                26326                   0.5          2006-2010         895199            -8.9
        2011-2015                27634                   2.0          2011-2015         800307             7.4
        2016-2020                29193                   1.7          2016-2020         871672            -2.5
        2021-2025                32446                   2.1          2021-2025         790355            -0.7
        2026-2030                36164                   2.3          2026-2030         809155             0.4
        2031-2035                40577                   2.4          2031-2035         823523             0.3

     Source: Law Society Research Unit (16 May 2018)



24   The Law Society of England and Wales
August 2018




UK legal services sector – real net exports                    UK legal services sector – full-time employees
(exports minus imports) forecasts                              in employment
 Years                  £m constant               % change      Years 000s                        % change
		                      2010 prices               per year     			                                per year
       2000                  1387                  12.4             2000            187              -1.6
       2001                  1815                  30.9             2001            204               9.1
       2002                  1925                   6.0             2002            213               4.4
       2003                  1915                   -0.5            2003            208              -2.3
       2004                  1870                   -2.3            2004            210               1.0
       2005                  2122                  13.5             2005            212               1.0
       2006                  2448                  15.4             2006            217               2.4
       2007                  2820                  15.2             2007            227               4.6
       2008                  2974                   5.5             2008            223              -1.8
       2009                  2810                   -5.5            2009            234               4.9
       2010                  2926                   4.1             2010            218              -6.8
       2011                  3296                  12.7             2011            222               1.8
       2012                  3006                   -8.8            2012            213              -4.1
       2013                  3162                   5.2             2013            219               2.8
       2014                  3471                   9.8             2014            219               0.0
       2015                  3863                  11.3             2015            218              -0.5
       2016                  3420                  -11.4            2016            217              -0.4
       2017                  3715                   8.6             2017            216              -0.4
       2018                  4142                  11.5             2018            215              -0.7
       2019                  4373                   5.6             2019            215               0.1
       2020                  4643                   6.2             2020            216               0.3
       2021                  4821                   3.9             2021            216               0.0
       2022                  5077                   5.3             2022            216               0.3
       2023                  5338                   5.1             2023            216              -0.4
       2024                  5614                   5.2             2024            215              -0.2
       2025                  5902                   5.1             2025            214              -0.4


5-year periods            Average              Average %       5-year periods     Average         Average %
		                      per year over        change per year   		               per year over   change per year
		                         period              over period     		                  period         over period
   1996-2000                 1213                   4.1          1996-2000          #N/A             #N/A
   2001-2005                 1929                   8.9          2001-2005          209               2.5
   2006-2010                 2796                   6.6          2006-2010          224               0.6
   2011-2015                 3360                   5.7          2011-2015          218               0.0
   2016-2020                 4059                   3.7          2016-2020          216              -0.2
   2021-2025                 5351                   4.9          2021-2025          215              -0.1
   2026-2030                 6875                   5.1          2026-2030          211              -0.4
   2031-2035                 8830                   5.1          2031-2035          208              -0.3

Source: Law Society Research Unit (16 May 2018)



                                                                                                  www.lawsociety.org.uk   25
Legal services sector forecasts 2017-2025




     UK legal services sector – part-time employees                 UK legal services sector – other employment
     in employment                                                  (partners, directors, owners and self-employed)
      Years 000s                                       % change      Years 000s                        % change
     			                                               per year     			                                per year
            2000                   42                     -4.5           2000             43                2.4
            2001                   39                     -7.1           2001             41               -4.7
            2002                   42                     7.7            2002             43                4.9
            2003                   50                    19.0            2003             44                2.3
            2004                   50                     0.0            2004             45                2.3
            2005                   50                     0.0            2005             46                2.2
            2006                   55                    10.0            2006             30              -34.8
            2007                   60                     9.1            2007             43              43.3
            2008                   59                     -1.7           2008             41               -4.7
            2009                   62                     5.1            2009             49              19.5
            2010                   64                     3.2            2010             53                8.2
            2011                   60                     -6.3           2011             50               -5.7
            2012                   53                   -11.7            2012             50                0.0
            2013                   50                     -5.7           2013             45              -10.0
            2014                   63                    26.0            2014             44               -2.2
            2015                   60                     -4.8           2015             45                2.3
            2016                   67                    11.7            2016             45                0.0
            2017                   61                     -9.0           2017             44               -3.3
            2018                   58                     -5.3           2018             43               -1.5
            2019                   56                     -2.3           2019             43               -0.5
            2020                   56                     -0.7           2020             42               -0.3
            2021                   56                     0.0            2021             42               -0.3
            2022                   56                     0.5            2022             42               -0.3
            2023                   56                     -0.3           2023             42               -0.9
            2024                   56                     -0.1           2024             42               -0.6
            2025                   56                     -0.3           2025             41               -0.9


     5-year periods            Average              Average %       5-year periods     Average         Average %
     		                      per year over        change per year   		               per year over   change per year
     		                         period              over period     		                  period         over period
        1996-2000                 #N/A                  #N/A          1996-2000          #N/A             #N/A
        2001-2005                  46                     3.5         2001-2005           44               1.4
        2006-2010                  60                     5.1         2006-2010           43               2.9
        2011-2015                  57                     -1.3        2011-2015           47               -3.2
        2016-2020                  60                     -1.4        2016-2020           43               -1.1
        2021-2025                  56                     0.0         2021-2025           42               -0.6
        2026-2030                  55                     -0.6        2026-2030           40               -1.0
        2031-2035                  54                     -0.4        2031-2035           38               -0.9

     Source: Law Society Research Unit (16 May 2018)



26   The Law Society of England and Wales
August 2018




UK legal services sector – total employment                    UK legal services sector – total employment
(number)                                                       (full-time equivalents)
 Years 000s                                       % change      Years 000s                        % change
			                                               per year     			                                per year
       2000                   272                   -1.4            2000            251              -1.2
       2001                   284                   4.4             2001            265               5.4
       2002                   298                   4.9             2002            277               4.7
       2003                   302                   1.3             2003            277               0.0
       2004                   305                   1.0             2004            280               1.1
       2005                   308                   1.0             2005            283               1.1
       2006                   302                   -1.9            2006            275              -3.0
       2007                   330                   9.3             2007            300               9.3
       2008                   323                   -2.1            2008            294              -2.2
       2009                   345                   6.8             2009            314               7.0
       2010                   335                   -2.9            2010            303              -3.5
       2011                   332                   -0.9            2011            302              -0.3
       2012                   316                   -4.8            2012            290              -4.1
       2013                   314                   -0.6            2013            289              -0.2
       2014                   326                   3.8             2014            295               1.9
       2015                   323                   -0.9            2015            293              -0.5
       2016                   329                   1.9             2016            296               0.9
       2017                   321                   -2.6            2017            290              -1.8
       2018                   315                   -1.6            2018            287              -1.3
       2019                   314                   -0.4            2019            286              -0.2
       2020                   314                   0.1             2020            286               0.1
       2021                   314                   0.0             2021            286               0.0
       2022                   315                   0.2             2022            287               0.2
       2023                   313                   -0.4            2023            285              -0.4
       2024                   313                   -0.2            2024            285              -0.2
       2025                   311                   -0.4            2025            283              -0.4


5-year periods            Average              Average %       5-year periods     Average         Average %
		                      per year over        change per year   		               per year over   change per year
		                         period              over period     		                  period         over period
   1996-2000                 #N/A                  #N/A          1996-2000          #N/A             #N/A
   2001-2005                  299                   2.5          2001-2005          276               2.4
   2006-2010                  327                   1.7          2006-2010          297               1.4
   2011-2015                  322                   -0.7         2011-2015          294              -0.7
   2016-2020                  319                   -0.5         2016-2020          289              -0.5
   2021-2025                  313                   -0.2         2021-2025          285              -0.2
   2026-2030                  306                   -0.5         2026-2030          279              -0.5
   2031-2035                  300                   -0.4         2031-2035          273              -0.4

Source: Law Society Research Unit (16 May 2018)



                                                                                                  www.lawsociety.org.uk   27
Legal services sector forecasts 2017-2025




     APPENDIX B:
     FURTHER DETAILS OF THE LEGAL SERVICES SECTOR MODEL



     The model and forecasts are for                          Government are also used to calculate disposable
                                                              income per household to use in the affordability term
     the UK legal services sector as a                        in the housing transactions model. Key assumptions
     whole (ie the combined turnover,                         relating specifically to the legal services sector are
                                                              made with respect to the underlying trend rate
     exports, employment etc. of                              of productivity growth, the effects on prices of
     solicitor firms, barrister firms, and                    increasing competition and regulatory changes, and
                                                              the effects on real turnover of the expected increase
     other legal service providers that                       in legal work from the process of the UK leaving the
     undertake ‘paid for’ legal work,                         EU.
     such as licensed conveyancers,                           Details of the main components of the model are
     patent and copyright agents).                            given below. The structure of the model is also shown
                                                              in the flowchart on pages 32 and 33.
     The model structure (ie the estimation of the
     relationships in the model) is based on Office for
     National Statistics (ONS) Annual Business Survey         Real turnover of the legal services
     data for the UK legal services sector and ONS data
                                                              sector
     for the UK economy, over the period 1995-2017. The
     relationships (equations) in the model are estimated     Real turnover (variable rturn) of firms in the UK legal
     using econometric techniques. This has enabled us to     services sector (the measure of the ‘volume’ of legal
     determine: (a) which factors best explain movements      work done by the sector) is broadly determined by
     of key variables (real turnover, employment, real net    factors relating to the demand for legal work from
     exports, and prices) in the legal services sector; (b)   the business sector (B2B work) and factors relating
     the magnitude of the effects of these factors on the     to the demand for legal services from personal
     variables; and (c) how quickly the factors affect the    consumers (B2C work).
     variables.
                                                              The two main factors relating to business demand
     The methodology also enables us to assess the            are the real profits of (non-financial) businesses in
     degree of confidence in the estimated relationships      the economy (rprof) and output of the UK financial
     (ie how closely the estimated relationships accurately   sector (yfin). Financial sector output is included
     reflect how the market actually works). The scope        separately as it is an important source of business for
     of the model is constrained slightly by the data         the legal sector.
     available, but the model does explain at least 90% of
     the movements of key variables in the legal services     Forecasts of real profits of (non-financial) businesses
     sector.                                                  in the economy (rprof) are not provided in the NIESR
                                                              macroeconomic forecasts using the same definition
     The forecasts for the UK legal services sector are       as we use in our model. We have therefore included
     based on the macroeconomic forecasts for the UK          a subsidiary equation which relates real profits to UK
     economy produced by the National Institute of            GDP at market prices (gdp), and real unit labour costs
     Economic and Social Research (NIESR) and forecasts       in the economy as a whole (rulcecon) ie unit labour
     for world economic demand produced by the IMF.           cost (ulcecon) deflated by consumer prices (cpi). The
     These macroeconomic forecasts are then fed into          results from the equation have also been adjusted
     our model to produce forecasts for the sector.           slightly for the effects of the post-EU referendum
     Projections for the total number of households in the    depreciation of the £ on profits of businesses.
     UK from the Department for Communities and Local


28   The Law Society of England and Wales
August 2018




The main factors relating to demand from personal          prices of legal services. Forecasts for legal services
consumers are the real (ie inflation-adjusted)             prices are also generated by a separate equation in
disposable (ie after tax) income of households             model (see page 31).
(rhhdi), the number of housing transactions (htrans),
and the average unemployment rate (ur). Forecasts
for housing transactions are generated by a separate       Housing transactions
equation in model (see below). Unemployment
is included in the real turnover part of the model         Housing transactions (htrans) are included in
as, under normal circumstances, an increase in             the model in more detail as, although residential
unemployment would be expected to lead to some             conveyancing work accounts for a relatively small
increase in legal work (eg through increased social        proportion of the total value of legal work undertaken
welfare work and also possibly increased criminal          (approximately 4-6% of solicitor firms’ total turnover
law work). However, the effects of unemployment            is accounted for by residential conveyancing work),
are relatively small compared to the effects of other      the magnitude of increases and decreases in housing
factors.                                                   transactions that can occur from year to year mean
                                                           that they can have a significant effect on the rate of
The real turnover equation also includes an                change in total turnover of the legal sector.
adjustment for the expected increase in legal work
from the process of the UK leaving the EU. These           The main factor determining the number of housing
adjustments are based on external estimates,               transactions each year is the affordability of housing
including results from specific questions on this in our   (afford) (ie average house prices relative to average
surveys of solicitor firms.                                disposable income per household). Affordability is
                                                           calculated as average ‘real’ house prices (rhp) divided
Real net exports (inflation adjusted exports minus         by average real disposable income per household,
imports) of legal services (rnetexp) and prices of         where average real house prices are defined as
legal services (pdlegserv) relative to the general level   average £ house prices (hp) divided by consumer
of consumer price inflation (cpi) are also included in     prices (cpi), and average real disposable income per
the real turnover model.                                   household is defined as total real disposable income
                                                           of households (rhhdi) divided by the total number of
Exports relate to work undertaken in the UK by             households in the UK (hh).
UK-based law firms for non-UK clients and are
therefore included in UK legal services sector             Average mortgage rates (mortrate) are also included
turnover. Forecasts for real net exports of legal          in the housing transactions equation. Changes
services are generated by a separate equation in           in mortgage rates mainly only have an effect
model (see page 30).                                       on transactions in the short-to-medium term, as
                                                           increases in rates mostly lead people to delay house
Legal services prices do not appear to have a major        moves rather than abandon them altogether and,
effect on real turnover, reflecting that most legal        similarly, decreases in rates can enable people to
services are a ‘derived demand’ (ie are bought as          bring forward moves.
a necessary input into other activities or actions).
However, there is some evidence that users of legal        There are also two types of one-off factors included
services have become more price sensitive over the         in the transactions equation. Factors are included
past three to four years (approximately the post           relating to the Government’s Help to Buy Mortgage
LASPO period) and this change is incorporated in the       Guarantee scheme (which ran from 1 April 2013 to
model using a ‘shift’ variable (dlaspo) on the real        31 Dec 2016) (dummy variable dhtbmgs) and its



                                                                                                www.lawsociety.org.uk   29
Legal services sector forecasts 2017-2025




     Equity Loans scheme (which was introduced on 8 Oct        Employment in the legal services
     2013 and is expected to finish at the end of 2020)
                                                               sector
     (dummy variable dhtbels). As these two schemes
     have only been in existence since 2013, they appear       Employment in the legal services sector is determined
     in the model as a single combined weighted average        by the level of real turnover in the sector, and in the
     variable (dhtbwtdav) as it is difficult to distinguish    longer term also by the underlying trend rate of
     between their effects over this short time period.        productivity growth. Separate models are included
                                                               for the number of full-time employees employed in
     Special factors are also included to take account of
                                                               the sector (eeft), the number of part-time employees
     the run-up to the 2007-08 financial crisis (dummy
                                                               employed (eept), and for the number of ‘other’ staff
     variable d2006) and the actual downturn in 2008
                                                               employed (empother) which, in the legal services
     (dummy variable d2008). These factors show that
                                                               sector, mainly consists of partners, directors, owners
     the crisis not only involved a sharp downturn in
                                                               and the self-employed.
     2008, but also an unusually buoyant market in the
     run-up to the crisis in 2006. It is estimated from the    The employment equations take into account that
     model that the financial crisis was responsible for       a change in firms’ turnover does not immediately
     approximately a 60% fall in transactions in 2008,         lead to a change in employment, as when turnover
     but the unusually buoyant market in the run-up to         increases, the costs of hiring and training new staff
     the crisis was responsible for transactions being         and the initial uncertainties about whether an
     approximately 29% higher in 2006 than they would          increase in turnover will persist, mean that changes
     otherwise have been.                                      in turnover may not be fully reflected in employment
                                                               until after a year, or possibly two years. Similarly,
                                                               when turnover decreases, it may take time to be fully
     Real net exports of legal services                        reflected in employment numbers.

     Real net exports of legal services (rnetexp) are          Underlying trend productivity growth is estimated
     mainly determined by the level of economic activity       from a time trend variable (prodtrend), included
     in other advanced economies (gdpadv), as these            in these equations, and appropriate changes are
     economies continue to be the main source of non-          made to the time trend for the forecasts to take
     UK business for law firms. Real net exports are also      into account expected increases in productivity
     affected by the level of economic activity in emerging    from factors such as increasing automation of legal
     economies (gdpemerg), although the effect is less         services functions.
     than that of the advanced economies, and appears
     to be more related to significant changes in the rate     Total employment in the sector (emptot) is the
     of growth in the emerging economies.                      sum of full-time employees employed, part-time
                                                               employees employed, and ‘other’ staff employed.
     Exchange rates effects are also included in the model,    The main constituent of total employment in the
     and separate variables are included for the US$/£         sector though is the number of full-time employees
     exchange rate (xrusdgbp) and the euro/£ exchange          employed, accounting for approximately 65%-70% of
     rate (xreurgbp). Generally, exports of legal services     total employment. Total employment in terms of the
     (and other services) are less affected by changes in      number of ‘full-time equivalent’ jobs (empfte) is also
     exchange rates, compared to, for example, exports         calculated, where each full-time job is counted as
     of manufactured goods, but the size of the recent         one position and each part-time job is counted as a
     change in the £ exchange rates does mean that this        half position.
     has had a significant effect on legal services exports.



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