Fears over the UK’s faltering economic outlook have been underlined by a survey showing a sharp drop in confidence among financial services firms, against the backdrop of the Chinese slowdown and the EU referendum.
Optimism among companies in the UK’s financial sector has fallen at the fastest rate since 2011, reflecting a backdrop of tumultuous markets and worries about a global economic slowdown. The downbeat outlook from one of the UK’s key sectors – which accounts for around 10% of GDP – will add to fears that the economy will slow this year amid global pressures and domestic challenges. The survey also indicated that banks in the UK are preparing to cut more jobs.
The CBI/PwC financial services survey showed banking and investment management were the gloomiest sub-sectors, while confidence was holding up better among building societies and insurance companies.
“Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services,” said Rain Newton-Smith, the director for economics at business lobby group the CBI.
George Osborne was forced to concede in this month’s budget that UK growth would be much slower than previously expected this year and next. The chancellor has blamed a weaker global economy but the government’s independent forecaster, the Office for Budget Responsibility, has flagged problems closer to home, most notably a weaker productivity outlook for the UK.
The CBI poll of 104 companies highlighted financial market instability, competition from within the sector and macroeconomic uncertainty as the top three challenges facing financial services over the coming year.
The quarterly survey showed that the volume of business at financial services firms was continuing to expand “at a solid pace”, while profitability improved, albeit at the slowest pace for almost two years.
However, Newton-Smith added that the EU referendum on 23 June could have hit sector confidence. “As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.”
Some business surveys have identified an impact on consumer and corporate confidence in the runup to the EU referendum. The Bank of England has linked a sharp fall in the value of the pound to uncertainty around the vote outcome.
The CBI has been vocal in its support for Britain staying in the EU. It says 80% of its membership wants to remain and that only 5% would support Brexit.
The lobby group recently published an analysis claiming Brexit would cause a serious shock to the UK economy, which could lead to 950,000 job losses and leave the average household £3,700 worse off by 2020.
Campaigners for the UK to leave the EU have questioned the findings. They counter that by leaving the EU, the UK can gain more control over trade and employment rules and they argue that staying in the bloc harms the UK’s economic prospects.
The CBI’s survey showed that compared with three months earlier, 14% of financial services firms were more optimistic and 35% were less optimistic, giving a balance of -21%. For banking alone the picture was more downbeat, with a balance of -48% indicating the sharpest drop in confidence since the depths of the global downturn in 2008-09.
Overall, more financial services firms reported that profits had increased rather than fallen. But with a net balance of just +13% reporting an increase, profit growth appeared to have slowed from the previous quarter, when the balance was +42%.
Employment in financial services increased in the last quarter. It is expected to remain flat in the next three months, however, with increases in the insurance and building society sectors offset by another sharp fall in headcount in banking, the report said.
Last month, Lloyds Banking Group revealed it was cutting 1,755 jobs and closing 29 branches, while earlier this month Royal Bank of Scotland said it was cutting more than 400 investment banking jobs in the UK and laying off 550 investment advisers.
Financial firms have been under pressure to cut costs as their productivity has fallen in recent years. Falling staff costs at banks had helped bring down total costs for the financial sector for the first time in more than a year, the CBI survey suggested.
London listings on hold
The London share listings market has had a slow start to 2016 with companies putting IPOs on hold until after the EU referendum, says consultancy EY.
In the first quarter of this year there were 15 initial public offerings (IPOs) – nine on the main market and six on the junior AIM market, raising £1.65bn. That compares with 13 listings over the previous quarter that raised a much-higher £4bn between them, according to EY’s IPO Eye report.
But Scott McCubbin, an IPO expert at the consultancy, said London remains the leading market in Europe for public listings and that the pipeline for future listings was strong with companies looking at dates towards the final quarter of this year and into 2017.
“The UK has experienced a slow start to 2016, brought about largely by market volatility, concerns regarding slowing economic growth and the uncertainty created by the EU referendum,” said McCubbin.
