Financial services set for slowdown

Bounce in activity in second half of 2009 not expected to be maintained

Britain's financial services industry, a key driver the economy, looks set to falter during the first three months of the year, research published today by the Confederation of British Industry and the accountancy firm PricewaterhouseCoopers suggests.

The CBI said that while activity in the financial services sector, which had rallied during the third quarter of last year, continued to grow during the final three months of 2009, businesses in the industry expect the recovery to be curtailed early in 2010.

Some 32 per cent of financial services businesses – ranging from banks and building societies to asset management firms and insurance companies – said their trading volumes had increased during the final quarter of last year, while 28 per cent said they had slipped. The positive balance of 4 per cent was lower than the 7 per cent recorded during the third quarter of the year.

Moreover, a balance of 13 per cent of businesses expect volumes to fall back during the current three-month period, the most negative forecast for more than a year.

"The bounce in UK financial services activity over the past six months is not expected to last as we enter 2010 – firms see their business volumes falling back again with no further improvement in profitability over the next three months," said Ian McCafferty, chief economic adviser to the CBI.

He added: "On a more positive note, financial services firms' confidence in the general business situation has continued to increase, profitability improved and a much slower reduction in numbers employed was seen in this survey – job losses are expected to be minimal in the coming quarter."

Banks, facing mounting bad debts and political pressures on issues such as capital adequacy and pay, are particularly gloomy, despite having enjoyed their first increase in business volumes since September 2007 during the past three months. The sector expects its income to fall back over the first quarter.

John Hitchins, a banking expert at PwC, said: "The sector's short-term outlook is less encouraging: activity and revenues are expected to decline over the coming quarter, predictions for demand remain weak and an uncertain regulatory future continues to temper the banks' growing confidence with caution."

That such anxieties are continue to disturb the banking sector will worry those who rely on the sector for lending. Britain's biggest banks have come under intense pressure to increase the amount they lend to businesses over the past 12 months, but total credit remains down.

More broadly, the CBI's survey will be seen as generally disappointing, with economists almost unanimous in predicting that the next set of official figures will show that the UK finally emerged from recession during the final quarter of last year.

While this is now the consensus view, opinions remain divided on the shape of the recovery in 2010, with many analysts warning that Britain could easily slip back into a downturn.

If the financial services sector were not to benefit from the recovery during the first three months of the year, such worries are more likely to become reality.

But last week, Barclays Capital revised up its forecast for the UK growth rate in 2010 to 2 per cent.

But optimism emerges in private businesses

Britain's patchy economic performance is reflected by two surveys published today that contradict the more gloomy picture of the CBI's report on financial services.

Grant Thornton reports that optimism amongst privately owned businesses about the year ahead is markedly improved on last year, while Ernst & Young found that company impairments have been much lower than expected during the recession.

Grant Thornton said that a positive balance of 16 per cent of privately owned businesses expect better sales and profits in 2010 than last year, compared to a negative 47 per cent a year ago. David Campbell, a partner at Grant Thornton, said: "The increase in optimism of private companies in the UK strongly indicates belief that the turbulence in the economy is, for the most part, easing."

Ernst & Young's survey found that 47 per cent of investors, analysts and lenders believed company impairments had been below expectations, but anxiety continues about downgrades.