Survey by CBI and PwC shows financial institutions suffered a decline in their business volumes in the fourth quarter of 2012
British banks suffered a loss of business in December, adding to fears that a slowdown in activity across several sectors of the economy at the end of 2012 will push the UK into a triple-dip recession.
Banks were among several financial institutions to have suffered a drop in business volumes, according to a survey by the CBI and accountants PwC. Investment banks and insurance brokers also saw a decline in business in the final month of the year as financial services dragged on economic output along with manufacturing, high street sales and much of the services sector. Only construction has shown any strength in recent months, mostly from commercial building in London.
PwC said the loss of tens of thousands of jobs across the financial services industry in recent years would lead to staff shortages in 2013 and limit the potential for investment and growth.
Of the 94 companies that responded to the survey, 25% saw business volumes rise, and 30% reported a fall. The resulting balance of -5% represented the second consecutive quarterly decline and depressed hopes of a return to moderate growth.
The survey comes days before official figures are expected to show Britain’s economy contracted in the fourth quarter of 2012.
The Office for National Statistics will release its first estimate of GDP in the three months to 31 December on Friday, when the chancellor, George Osborne, is expected to be at the World Economic Forum in Davos.
A contraction in the final three months of last year will not technically determine that the UK has entered a third recession in four years because output needs to fall in two consecutive quarters before the Treasury concedes the economy has reached that embarrassing situation. Nevertheless, it will be a blow to Osborne, who will be concerned that his economic plan is being knocked off course.
A recession in most of the eurozone and uncertainty in Washington surrounding Republican demands for further austerity have dampened hopes of a recovery in exports. Disruption caused by recent snowy weather could also hamper the recovery in the first quarter of 2013 and herald a full blown triple-dip recession.
The Ernst & Young Item Club warned that the UK may grow by only 0.9% during 2013 unless the government changes its economic policy.
“There is scope for borrowing to help fund infrastructure investment,” says Item’s Peter Spencer, “and the government could certainly do more to encourage housing investment, which is subtracting from GDP when it should be adding to it.”
A study by Incomes Data Services shows the situation for many workers is unlikely to change in 2013. Despite warnings from some Bank of England officials of a risk that pay will spiral as the economy improves, IDS said average pay increases for managers and professionals would be limited to 2.2% and public sector managers would be worse affected than their peers in the private sector.
IDS forecasts that public sector pay will increase by just 0.7% on average, an even slower rate of increase than the 1% annual cap on public sector pay growth announced by the chancellor in November 2011.
Private sector pay awards are expected to be more generous, with average 2.6% pay rises forecast across all private sector industries. This will still be some way below the Office for Budget Responsibility’s 3% RPI inflation forecast for 2013. Adam Cohen, researcher at IDS and author of the report, said: “Our latest figures suggest that 2013 will be the third year running that managers and professionals will not have seen above-inflation pay rises.” Across the whole economy pay rises declined from an average of 2.5% in January last year to 1.9% in December, IDS said.
PwC said that despite the decline in business last year, banks were optimistic about 2013, though their sunny outlook may be based on an ability to increase profits from charging higher fees and interest rates.
The report said: “Profitability was lifted by another widening in spreads, and banks were more optimistic about conditions than three months ago. Total costs fell strongly, for the first time since September 2010. But the unexpected fall in business volumes led to a slight increase in average operating costs per transaction.”
Kevin Burrowes, UK financial services leader at PwC, said: “The banks reported a dramatic return to optimism, with the highest balance of respondents since 2004 feeling more confident than three months ago, reflecting positive forecasts for revenue and profitability. Although very welcome, banks made similar forecasts before, only to be disappointed. Commercial business in particular failed to live up to its promise, declining during the last months of 2012.
“Banks are facing both a shortage of skills and a growing capital challenge. The UK banking sector is well capitalised by European standards, but banks now expect the ability to raise finance to be a significant limitation on business during 2013. This implies that their upbeat predictions for growth could be undermined by an inability to commit sufficient capital to lending.”