Housing slowdown hits growth in financial services

Growth in Britain's financial services sector tumbled to its lowest point for a decade over the winter as the economic impact of the housing slowdown started to bite, the UK's largest employers' group said yesterday.

Optimism, business volumes and profits dropped sharply as demand for mortgages fell away in the final months of last year, the CBI said.

The survey came as a report from the Chartered Institute of Purchasing and Supply (CIPS) showed growth in the services sector overall slowed in December, reviving speculation of an imminent cut in interest rates.

The CBI said sales and profits at financial services companies fell to their lowest level for 10 years. Of the 103 companies surveyed, 21 per cent said volumes rose while 31 per cent reported a fall, leaving a balance of minus 10 per cent – the worst since December 1992.

Ian McCafferty, the CBI's chief economist, said the survey painted a "disturbing picture". "There are growing question marks over the resilience of consumer spending and the housing market as we move into 2003," he said.

The CBI warned companies were planning major jobs cuts this year while investment spending had already been cut back to its lowest level for 10 years. However, the CBI held back from calling for a rate cut, despite its own surveys showing decline in the manufacturing, retail and now financial services sectors.

Mr McCafferty said he expected rates to stay on hold for the first half of the year. "We are not calling for a cut this week and we don't expect the Bank to deliver one," he said.

The broader survey by CIPS of the services sector, which makes up two-thirds of UK economic output, told a similar story. Activity grew at its slowest rate since February last year as the pace of new orders slowed and firms continued to cut back on staffing levels.

"This reduction in the rate of service sector growth makes the coming year very uncertain," Roy Ayliffe, a director of CIPS, said. "The sector could move towards stagnation in coming months, particularly as UK manufacturing continues to struggle."

The surveys were the last pieces of economic evidence ahead of Thursday's decision on interest rates. Most economists in the City expect rates to be left on hold for now but some believe the case for a cut is mounting.

Simon Rubinsohn, the chief economist at the brokers Gerrard, said: "We expect there to be a full exploration of the case for a further easing in policy." But other analysts were concerned by a sharp rise in the prices charged by services firms, which are now running at their fastest rate since mid-2001.

Similar surveys from the US and the euro area also showed a slowdown in their services sectors.