City workers face job losses and bonus cuts after crisis in markets

City workers face 6,500 job cuts and reduced bonuses next year as the credit crunch bites, a report by the Centre for Economics and Business Research said.

Jobs in the Square Mile surged by 11,000 to a record 349,100 in the first half of this year as the roaring debt markets fuelled hedge fund activity, sales of structured credit products and private equity-driven takeovers.

The main casualties of jobcuts will be in investment banking, where about 2,300 staff will be cut, the CEBR forecasts. "What we are likely to see as we enter 2008 is a reduction of almost one for every two jobs added this year," Sarah Bloomfield, a CEBR economist, said. The 2 per cent fall will feel worse because the City has become used to adding jobs on a huge scale, she added.

Bonuses are set to fall by 16 per cent to a total of £7.4bn from last year's record £8.8bn. The payouts face a drop on the same scale next year, taking the total to the lowest level since 2003.

A slowdown in Britain's financial services sector always causes grave concern at the Treasury because City profits and bonuses are a major source of Government revenue. Increasing concerns about the effects of the credit crunch will provide a gloomy backdrop for the Chancellor's pre-Budget report and Comprehensive Spending Review tomorrow.

Firms in the City have been hit by higher costs from write-downs caused by the sub-prime crisis and increased funding costs from the drying up of the inter-bank money markets.

The CEBR said the easiest way for institutions to offset this is to slash bonus payments. Investment banks and hedge funds will make the biggest cuts, the research consultancy said.

The bonus cuts will dampen the London property market and sales at luxury retailers, Jonathan Said, the CEBR's senior economist said. But he added that the remaining bonus pool would be enough to avert a slump in those markets.

London has thrived as a global centre for financial services by attracting firms from outside the UK which have based their international operations in Britain. But that leaves Britain exposed to the fortunes of institutions in Europe and the US, where banks have been announcing massive write-downs as a result of the credit crunch. Switzerland's UBS announced 1,500 jobs in its global fixed-income division two weeks ago. Fears are growing that US banks such as Merrill Lynch, which admitted to $5.5bn of write-downs last week, will be forced to make cuts.