Sentiment in the UK financial services industry worsened over the summer despite solid growth in business volumes and profits, reflecting the uncertainty the Brexit vote creates for the sector’s future access to European markets.
A quarterly survey conducted by the CBI business lobby and PwC found that 28 per cent of firms were less optimistic about the overall business situation than three months earlier, with 15 per cent saying they were more optimistic. It was the third consecutive quarter of deteriorating sentiment — the longest spell of pessimism since the depths of the global financial crisis.
“The challenges facing the sector have not gone away — they’ve actually grown. Add the uncertainty caused by Brexit to low interest rates, technological change and strong competition, and it’s plain to see why optimism is falling and pressure on margins remains intense,” said Rain Newton-Smith, the CBI’s chief economist.
This gloom is somewhat at odds with the survey’s findings on current activity. Most areas of financial services saw brisk growth in business volumes and improving growth in profitability, and expected this to continue in the coming quarter, albeit at a more moderate pace.
Yet this picture is consistent with developments in the broader UK economy — the immediate shock of the referendum does not seem to have been as serious as many feared, but most economists still predict a sharp slowdown next year as businesses postpone investment decisions until the consequences of Brexit become clearer. For the financial services sector, the uncertainty is particularly acute, given the paramount importance to the City of “passporting” arrangements that allow firms to sell their products seamlessly elsewhere in the bloc.
So far, EU leaders have shown little inclination to grant the UK access to passporting, or any equivalent arrangement, unless Britain accepts the rules that go with the single market, including free movement of people.
The CBI survey found the immediate impact of the Brexit vote to be negative for a majority, but to a fairly modest degree — with more than a quarter of firms reporting some impact on their revenues, funding costs and profits, but a relatively small proportion saying it had affected their investment or hiring intentions.
However, more than half the respondents saw changes in access to EU markets as the chief risk facing their business over the medium term.