Credit crunch continues in downward spiral
30 June 2008

Written by Harriet Wigmore

The effects of the credit crunch have worsened in the previous quarter according to the latest financial services survey carried out by CBI and PricewaterhouseCoopers LLP (PwC).

Ten months after the initial problems were witnessed, 44 per cent of those questioned reported sharp falls in profitability – the sharpest fall since late 1989 when the survey began - compared to the 18 per cent reporting decreases in profitability last March.

When asked about business volume trends in the three months to June, just 20 per cent of firms said they had seen a rise, whereas 55 per cent said business volume had decreased. Although the resulting balance of -35 per cent did not come as a surprise, it was the weakest result in over 15 years, and 44 per cent predicted a continuation in business volume.

Further job cuts were experienced in the sector with a balance of 22 per cent reporting a fall in the number of employees; this result was slightly slower than in the March survey and was in fact less than predicted. Nevertheless, with 19 per cent expecting to see job losses over the next three months, the trend is seemingly set to continue.

Perhaps one of the most noticeable outcomes of the survey was that, compared to the previous quarter, companies are no longer feeling insulated from the credit crunch. In an attempt to lessen the impact of the difficult situation, a balance of 16 per cent of firms expect to spend less on marketing in the coming year than in the previous one – the first planned reduction since 2003. An average of 57 per cent claimed that they were feeling less optimistic about the overall business situation in the financial services sector than they were in March, which echoes Andrew Kail of PwC’s comments that the “fall in confidence was the steepest for four years”.

Firms expect the level of demand to be the most significant barrier to limit business over the next 12 months and are now less worried about competition than in the last few years.

Andrew Kail, of PwC, said: "Life insurers have reported their steepest decline yet for profitability. New business is expected to continue to fall, investment business is under threat from perceived market volatility and demand for protection products is being affected by the slowdown in the housing market. The slowdown is putting pressure on the sector's own investment and capital plans. Life insurers intend to commit less capital to IT projects and look likely to reduce headcount."