The impact of the credit crunch on the South East’s financial services industry has worsened over the past quarter, as profitability fell at a record pace and business volumes fell at the fastest rate in 17 years, according to the CBI.

The latest Financial Services Survey from the CBI and PricewaterhouseCoopers LLP also showed that credit remains expensive and in short supply with the gap between lending and borrowing rates widening more than at any time in the survey’s history.

CBI South East Regional Director Malcolm Hyde said: “The impact of the credit crunch on financial services has deepened over the last three months, and conditions look set to remain difficult for some time yet.

“Although credit markets have been somewhat calmer of late, the interbank lending system is still looking gummed up, and spreads have widened more than at any time in the past eighteen years.

“Profitability in the sector is being badly hit, so firms are trying hard to trim costs by planning to cut back on training and marketing for the first time in a number of years. The problems of the financial sector will echo throughout the wider economy and will drag economic growth down this year and next.”
Job cuts have continued and business has been lost across all customer bases. Although the credit crunch has already been underway for ten months, nine out of ten UK firms (91%) think it will take more than six months for market conditions to return to normal.

Financial services firms had expected profitability in the sector to remain stable but instead it dived sharply, with a balance – the difference between the percentage of firms reporting an increase and those reporting a decrease – of 44% reporting a fall, compared with 18% in March. This is the fastest rate of decline in profitability since the survey began in late 1989, and another heavy fall is anticipated over the next quarter.

Jobs were again lost in the sector, and a balance of 22% reported a fall in numbers employed, but this outcome was not as bad as predicted, and slightly slower than in the March survey. A balance of 19% expects to cut jobs over the next three months.

In a sign that firms are cutting back to weather difficult times, a balance of 16% expects to spend less on marketing in the next 12 months than they did in the past 12 months, which is the first planned reduction since June 2003. Planned IT capital expenditure is also well below its long run average.

Concern about the cost of finance as a constraint to investment edged higher to a new record high (26%), while worries that the ability to raise funds might limit business in the year ahead fell back slightly from the survey high in March (40% down to 32%).

Firms expect that the most significant barrier to limit business over the next 12 months will be the level of demand, but they are less worried about competition or the adequacy of systems capacity than they have been for the past few years.
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