It appears that uncertainty over the upcoming EU referendum, alongside the economic downturn in China, has led to a sharp fall in confidence among financial sector companies, a recent survey has revealed.
Confidence in the UK economy has fallen by the quickest rate since 2011, highlighting the turmoil in the markets and a global economic slowdown. This pessimistic outlook from one of the most important sectors in the UK economy- making up roughly 10% of GDP- will fuel concerns about the fall in economic growth expected this year. The survey also warned of more banks and financial services firms cutting British jobs in the near future.
The survey was carried out by the CBI (Confederation of British Industry) and PwC. It revealed that investment management and banking were the two most sceptical sub-sectors, while confidence in building societies and insurance companies was holding up better.
Economy Caught in “Perfect Storm”
The director for economics at business lobby group the CBI, Rain Newton-Smith, said:
“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.”
The Chancellor of the Exchequer, George Osborne, admitted at the March Budget that UK growth would be slowing more than previously forecast in this year and the next. Osborne has put this down to poor conditions in the global economy, however the Office for Budget Responsibility has blamed issues that are much closer to home. The government’s independent forecaster has said that a number of issues with the UK economy, including a weaker productivity performance, are responsible for the reduced forecasts.
The poll, carried out by the CBI, was completed by 104 companies across the UK. The results highlighted issues such as instability in the financial markets, competition inside the sector and macroeconomic uncertainty as the main three difficulties that the industry will face over the course of 2016.
The survey, carried out quarterly, revealed that the rate of business for financial services companies was still increasing “at a solid pace”. However, whilst profitability is still increasing, it is doing so at the slowest rate since 2014.
Uncertainty Over EU Referendum
However, Newton-Smith went on to say that the upcoming referendum on EU membership has led to a great deal of uncertainty around the future of British business.
“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.”
Several business polls have shown that consumer and corporate confidence has been damaged in the build up to the EU referendum. The Bank of England also blamed EU uncertainty for the sharp drop in the value of the pound that has been seen in recent times.
The CBI has been extremely outspoken in its support for continued EU membership. It reported that 80% of its members are in favour of staying in the EU and only 5% were in favour of Brexit.
The group also released the results of its extensive analysis into the outcome of a Brexit, saying that it would pose aa serious shock to the British economy. It went on to say that such as decision could lead to the loss of around 950,000 jobs and could also hit household incomes by an average of £3,700 by 2020.
However, this analysis has been criticised by campaigners for the vote leave campaign. Individuals in favour of Brexit have said that the UK would be able to gain more control of its employment and trade rules, which would allow the country to target problems within its economy.
Biggest Fall in Confidence Since Crash
The results of the CBI’s survey showed that 14% of financial services firms had a more positive outlook and 35% were more pessimistic than they were three months ago- giving an overall balance of -21%. When this research was refined to the banking sector alone, it showed a gloomier mood with a total balance of -48%. This represents the sharpest fall in confidence since the height of the economic crash in 2008-09.
In total, there were more financial firms that reported a rise in profits than those which reported a fall. However, the overall balance now sits at only +13%, which is down from +42% in the previous quarter.
Total employment in the financial sector went up in the last quarter. However, it is now expected to remain level for the next three months. Increases in employment at building societies and insurance companies is predicted to be offset by drops in the banking sector.
This has been seen in recent times with Lloyds Banking Group announcing that it would be cutting 1,775 jobs and shutting down 29 branches. Royal Bank of Scotland has also said that it will be cutting more than 400 jobs in its investment banking sector and getting rid of 550 investment advisers.
A fall in productivity levels at financial firms has put them under pressure to find ways to cut costs. The drop in staffing expenses has helped bring down total costs for the financial services sector for the first time in over a year, according to the survey.
Slow Start for London Listings
The London listings have had a underwhelming start to the year with many companies putting off IPOs until the referendum has been held, reports consultancy firm EY.
Q1 of this year saw a total of 15 IPOs (initial public offerings), nine of which were on the main market and six of which were on the junior AIM market, combining to raise a total of £1.65bn. The previous quarter saw 13 listings, which raised a total of £4bn. These figures came from EY’s IPO Eye report.
However, an IPO expert from EY, Scott McCubbin, believes that London is still leading the way for listings when compared with other places in Europe. He went on to say that the future looks bright, with many firms looking at dates towards the end of this year and the beginning of 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.”