Financial services facing ‘crossroads’ as optimism drops

● Some positive signs but longest period of falling sentiment since financial crisis

Sentiment in UK financial services continued its downward trajectory in the three months to September, although there were some key signs of growth as well as optimism for the coming quarter, according to new data.

The latest quarterly survey of the sector from the Confederation of British Industry (CBI) and accountant PWC, covering 94 firms, was unveiled today. It found that overall optimism about the business situation fell for the sixth time in the last seven quarters, marking the longest period of falling sentiment since the global financial crisis of 2008.

A total of 12 per cent of firms said they were more confident compared with three months ago, whilst 18 per cent were less optimistic, giving a balance of -6 per cent.

Turning to overall business volumes, growth slowed relative to the first half of 2017, but the overall level of busiaffecting ness was deemed normal. More than a quarter of companies reported higher business volumes, while 15 per cent said they were down, giving a rounded balance of +13 per cent, in contrast to +44% in June. However, looking ahead to the quarter to December, a balance of +27 per cent of firms expect volumes to rise.

As for profits, there was further growth for a third successive quarter, although more slowly than in the first half of the year as was the case with business volumes. A balance of +13 per cent of firms reported that profits had increased, down from +35 per cent in June, while profitability is generally expected to improve at a stronger pace in the three months ahead.

Rain Newton-smith, CBI chief economist, said: “It’s encouraging to see volumes and profitability continuing to expand for most financial services firms, with hiring expected to pick up and investment intentions improving.”

But she also highlighted the prolonged drop in optimism. “With Brexit uncertainty the wider economy, it’s vital that substantive progress is made during the next round of Brexit negotiations, so that transitional arrangements can be agreed and businesses can make decisions now about investment and employment that will affect economic growth and jobs far into the future.”

The top factor seen likely to limit investment was uncertainty about demand or business prospects, at 58 per cent. Additionally, 70 per cent said it was essential to ensure the UK remains a leading fintech and innovation centre,

Andrew Kail, head of financial services at PWC, said the financial services sector is “at a crossroads. The way ahead is uncertain, particularly as Brexit negotiations are yet to be resolved. Specifically, the UK’S regions must also be given every opportunity to flourish as domestic and specialist financial services centres.”

Separate data from accountants and business adviser BDO found that the UK'S export growth index fell in the third quarter to 101.5 from 104.8, overtaken by Germany for the first time in 18 months.