Financial sector heads for slowdown

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The Independent Online
The CBI yesterday published evidence of a slowdown in the financial services sector, with volumes of business growing at their slowest rate for 18 months. As Lea Paterson reports, these figures bolster the CBI's campaign for no change to interest rates.

The most recent CBI/Coopers & Lybrand financial services survey points to the conclusion that the sector has come off the boil. Though the level of business activity in financial services is still higher than normal, growth rates are starting to slow. Forty-six per cent of companies reported increases in the volume of business in the last three months, but 20 per cent reported that business was down. Subtracting the laggers from the leaders gives a net total of 26 per cent, the headline figure used by the CBI to monitor business activity over time. In June this figure was 40 per cent, up from 39 per cent in March. Yesterday's headline figure was the lowest since March 1996.

Securities traders were the biggest losers, with the rate of decline in business volumes over the last three months the largest since March 1995. A net total of 77 per cent of respondents said business was down between June and September. But this fall in business volumes follows strong growth in the previous three surveys and the CBI sees the decline as a correction following overheating in the sector.

With business activity in securities trading still at higher than normal levels, further correction is likely. Securities traders seem to agree, with business confidence sharply down, and a tailing off in demand cited as the main constraint on growth for the coming year.

Though securities trading was the only sector to see an absolute fall in business volumes, growth also slowed for banks, finance houses and building societies. The CBI expects this trend to continue over the next three months, as do survey respondents. Business confidence in the sector as a whole is at its lowest ebb for over two years. It was not all bad news, however, with business growth rates up for fund managers and insurers. Life insurance companies had a particularly good three months with business growing at its fastest rate since December 1996.

The CBI interprets this slowdown in financial services as part of a wider cooling off in the services sector. As a result, the CBI sees no need for the Monetary Policy Committee to raise interest rates this week, a move which would serve to dampen further demand in the services sector. Sudhir Junankar, the CBI's Associate Director of Economic Analysis, said that he would like to see "interest rates left on hold at the moment".