After a disappointing start to the year, the UK financial services industry is now more optimistic about the future. Or so says the latest survey of the industry, published on Monday by the CBI and PricewaterhouseCoopers.
Business volumes are expected to grow at the fastest rate for a year and employment expectations are the strongest since the survey began in 1989. Fund managers, banks and building societies recorded the biggest rises in optimism while general insurers and finance houses were the only sectors less optimistic than three months ago.
Thirty per cent of companies said business volumes were down and 28 said they were up. The balance of minus two per cent suggests that business remained flat over the past three months. But a balance of plus 23 per cent of firms expect an increase in volumes over the next three months, the strongest expectation since March 2004.
Despite employers gloomy predictions of job cuts, the numbers employed in financial services barely changed over the last quarter with roughly the same number of firms saying they were employing more people as saying they were employing fewer. But looking ahead, 53 per cent of companies expect employment to be up over the next three months while only five per cent expected it to go down. The balance of plus 48 per cent is the most positive since the survey began in December 1989.
“The industry is now confident of an upturn in business volumes particularly from sales of savings and investment products,” says John Hitchins, UK Banking Leader at PricewaterhouseCoopers. “Concerns in the previous survey about the impact of falling growth in consumer spending appear to have receded. As a result employment remained broadly stable and companies found it wasn’t necessary to make the large job reductions they predicted at the end of last year. In fact, with the industry in a more bullish mood, companies are forecasting a significant expansion in jobs over the next three months.”
The survey also reveals that, despite an improvement in average spreads and commissions and sharp reductions in average costs, profits growth was weaker in the first quarter of 2005 and is expected to weaken further.
Thirty-six per cent of companies said profitability was up compared with the first quarter of 2004 while 24 per cent said it was down. The balance of plus 12 per cent compares with plus 22 per cent in the December survey. A balance of only plus eight per cent is expected over the next three months.
Expectations for investment in land and buildings over the year ahead were the strongest for eight years. Thirty-eight per cent of firms expect to spend more on land and buildings over the next year than over the last, while 15 per cent expect to spend less. This gives a balance of plus 23 per cent. Firms are also optimistic about spending on marketing and IT over the next 12 months.
“The survey shows a mixed picture across the financial services sectors,” says Ian McCafferty, CBI Chief Economic Adviser. “Not all firms had a weak start to the year, firms tied in with the stock market, such as securities traders and fund managers have done quite well. By contrast, firms connected with the housing market, such as building societies and banks have experienced a more difficult climate. Though, like financial services as a whole, these sectors are looking forward to an improvement in the months ahead.”
Fund managers, and finance houses saw the strongest growth in business volumes over the last quarter. Building societies and general insurers recorded the biggest falls in business. Asked about the next quarter, every sector, apart from general insurers, expected business to rise. Building societies and fund managers have the strongest expectations for the immediate future. Securities traders, fund managers and banks expect the strongest growth in employment over the next quarter. Only finance houses expect to cut jobs and only very slightly.
Over the past quarter, growth in the value of business done over the internet has strengthened contrary to expectations. Many barriers to e-business have eased since December’s survey, in particular the cost of technology and customer access to the internet. But companies expect greater e-business competition from new entrants, especially in banking and insurance.
The survey was conducted between 23 February and 9 March 2005. A total of 99 companies responded.