By Mark Fairlie.

One of the UK’s most important business sectors, financial services, has seen a contraction in demand during the last three months of 2018, according to the latest CBI/PwC Financial Services Survey. While 24% of the 84 firms which responded to the survey saw an increase in the level of business, 32% reported a decline.

The firms suffering the steepest declines in trading volumes were in investment management which, according to the report suffered the “steepest fall in activity…since the financial crisis.” Activity was flat or falling for specialist lenders, banks, and building societies. The insurance sector, as a whole, expanded during the quarter, bucking the wider trend.

Other key findings from the report include:

  • a general decline in optimism in the sector
  • profitability was flat across the sector
  • 14% of firms had increased their staff numbers while 9% had let staff go but employment is expected to grow faster in the first quarter of 2019

Financial sector importance

According to a Parliamentary research briefing, the financial services sector contributes 6.5% of total UK economic output, equivalent to £119bn. The United Kingdom has run trade deficits consistently for decades – a trade deficit is when a country buys more in from abroad than it manages to sell to other countries. The UK sells far more services to other countries than goods and, according to the 2018 Pink Book, financial services was the main reason that the country’s trade deficit narrowed from 5.2% to 3.9% (source: UK Finance).

There is disagreement among economists about whether a trade deficit is a bad thing and, if it is bad, the severity of the consequences. Some economists believe that a persistent trade deficit affects economic growth, stability, interest rates, and the value of currencies in a negative way (source: Investopedia). The current UK government believes that the reduction or elimination of the country’s trade deficit is positive (source: therefore the decline in financial services sector activity could present challenges in achieving a further reduction.

Demand for UK financial services dropsOngoing uncertainty

The report expects the fall reported in the last quarter of 2018 to continue into the first quarter of 2019.The main reasons for the drop, as reported on Ready For Brexit, was macroeconomic uncertainty, regulatory compliance issues, and preparation for the UK’s forthcoming departure from the European Union.

The head of financial service at PwC, Andrew Kail, commented that

“(c)ontinued economic and political uncertainty means last year ended on a more pessimistic note than previous quarters for many working in UK financial services.”

The downturn in the financial services sector follows on news about a general downturn in the retail sector, another large sector employing millions of people. According to the British Retail Consortium, the number of people visiting shops in December 2018 fell for the thirteenth consecutive month at a rate of 2.6%. Shopping centre footfall fell 3.9%, retail parks by 2.1%, and the High Street by 2.1%. Speaking to Daily Business Group, Helen Dickinson of the Consortium stated that

“Many well-known brands have disappeared from our high streets, and without government intervention, there will be more to come…The government should take action by reforming the broken business rates system and ensuring consumers and retailers retain tariff-free, frictionless trade with the EU after March 29.”