Key facts
- Business activity in the UK financial services sector collapsed in the second quarter, with the CBI's net score falling to -58 from 65 in March.
- Business confidence and profitability levels also saw sharp declines.
- Investment managers were more optimistic, but insurance companies experienced significant drops in activity.
- Uncertainty about future prospects and poor returns on investment were identified as the primary constraints on growth.
- Businesses expect technology investment to rise, while spending on buildings and machinery is likely to stagnate.
Business activity in the UK's financial services sector has experienced a significant downturn in the second quarter, according to a new survey by the Confederation of British Industry (CBI). The net score for business activity plummeted to -58 in June, a stark contrast to the 65 recorded in March, indicating a sharp decline in volumes for firms including banks and insurers.
Alongside the drop in activity, business confidence has also fallen rapidly, and companies reported a significant deterioration in profitability levels. While investment managers showed more optimism about future prospects, insurance companies bore the brunt of the decline in activity. The primary factors limiting growth were identified as poor returns on investment and uncertainty about future economic conditions.
Looking ahead, businesses indicated an expectation of increased investment in technology, though capital spending on physical assets like buildings and machinery is predicted to stagnate or decrease. This sentiment reflects broader concerns within the sector about the economic outlook.
A separate survey conducted by wealth manager Rathbones suggested that political uncertainty, particularly surrounding the incoming government's policies, is a more significant worry for businesses than higher interest rates or persistent inflation. Clients have expressed concerns about potential shifts in taxation, pension rules, and financial planning strategies.
The sharp slump in financial services activity serves as a potential warning to Andy Burnham, who is anticipated to assume leadership soon. The financial services sector represents approximately one-tenth of the UK's national output, making its performance crucial for the country's economic growth prospects.
Chancellor Rachel Reeves is scheduled to deliver the Mansion House speech, outlining government policy for the financial services sector. However, with her potential departure from the Treasury expected shortly thereafter, investors may view her remarks with caution, as attention shifts to her successor, with Ed Miliband widely considered a likely candidate.
City analysts are also closely watching the advisory appointments for proposed reforms concerning land taxes and devolution. Notably, former Bank of England deputy governor Andy Haldane, who has advised Burnham, has previously advocated for reforms such as scrapping the triple lock pension and favoring domestic assets for pension tax reliefs.