The UK financial services sector is experiencing the seventh consecutive quarter fall in business confidence, according to the 78th Confederation of British Industry (CBI)/Pricewaterhouse-Coopers (PwC) financial services survey. The survey also revealed that record drops in income levels hit the sector, while business volumes have continued to fall sharply (-47%) for the sixth consecutive quarter. The industry has cut jobs at the fastest rate since 1993 to try and trim costs and alleviate steep falls in profitability. Investment plans have also been heavily scaled back.
One in three of firms said they were less optimistic about the overall business situation in the financial services sector than they were in December. A net 53% of firms reported a drop in fee, commission and premium incomes, while a balance of 54% saw falls in net interest, investment and trading incomes. With a balance of 40% of firms reporting a reduction in headcount, the numbers employed in financial services fell at their heaviest rate since June 1993 (-41%). Out of a workforce of one million employees, the sector lost 11,000 jobs in the last quarter of 2008; the job cuts accelerated in the first quarter of 2009 with 15,000 losing their jobs. This level of job losses looks to continue into the second quarter.
There is no doubt that the UK is entering a “severe” recession, according to the report. Economic growth forecasts continue to be revised downwards at a remarkable speed. For example, HSBC’s estimate of UK GDP growth in 2009 has moved from minus 1.6% to -2.5% in less than three months. Increasing unemployment, falling house prices, volatile stock markets and very low base rates have negative implications for the top and bottom lines of most sectors of the financial services. However, on a more positive note, average spreads, which show the difference between the rates at which capital is borrowed and lent, narrowed for the first time since December 2007.
Ian McCafferty, CBI chief economic adviser, said: “Looking forward, there are some hopes that the pace of decline will moderate through the summer. But there are few expectations of a return to normality. This survey found that 100% now expect that it will take more than six months for the market to turn around – this is the first time in six quarters [that all respondents agreed a longer timeframe].”
In a supplemental question on the impact of the crisis on UK financial services as a whole, the survey revealed that 67% of the respondents felt that it had left the industry less competitive than before.
Commenting on the question, Andrew Gray, UK banking advisory leader at PwC, said: “The level of competiveness directly relates to the level of the confidence. The reliance on government support is seen as a challenge for the UK to act on the international playing field. True there is less overseas activity in the UK market, but the City of London is an international finance centre, it has built up the pool of talent, it is in the right time zone, etc, and is still considered to be a strong centre.”
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