Banks hit by slowdown in the wider economy

Britain's financial services sector is the latest part of the economy to see the pace of the recovery slow, new data suggests today, with the rate at which volumes of new business are growing declining markedly.

The warning, from the Confederation of British Industry, will add to growing nervousness that the recovery across the economy is stalling, following poor data from the services and manufacturing sectors over the past week, as well as the ongoing slump among consumer-facing businesses such as retailers.

However, the CBI said there were silver linings to the clouds hanging over the financial services sector, with some evidence that profitability is improving and – crucially, given job cuts announced by leading banks last week – that the outlook for employment now looks more encouraging.

The CBI said that while 44 per cent of financial services sector companies had reported rising business volumes over the past three months, compared with 28 per cent reporting a fall, the positive balance of 16 per cent was well below expectations and lower than the balances seen in any of the three previous quarters.

Financial services businesses also told the CBI they now expected to see the picture deteriorate further. The balance of companies expecting to see growth in the next three months is now just 8 per cent, the lowest since December 1999.

Ian McCafferty, the CBI's chief economic adviser, said the financial services business was seeing similar trends to other areas of the economy. But he said that, despite the slowing recovery, the number of people employed in the financial services sector had risen over the past three months for the first time since last September – and at the fastest rate since 2007. "The financial services sector continued to recover, but with slower volume growth, following three stronger quarters," Mr McCafferty said. "What is heartening is the unexpected, strong rise in numbers employed in the sector, the fastest since the financial crisis began in 2007."

The increase in the number of people finding work in the financial services sector is particularly welcome, given the 15,000 job cuts announced last week by Lloyds Banking Group, with HSBC also announcing a further 850 losses.

The CBI said the banks were now beginning to recruit but warned the headwinds they faced from regulatory action were raising their costs.

Andrew Gray, UK banking leader at PricewaterhouseCoopers, which helped the CBI compile the statistics, said: "It has been an unsettling quarter, given the release of the Independent Commission on Banking's interim report and the loss of the payment protection insurance case.

Mr Gray warned that while recruitment had increased in the banking business, the trend could easily reverse.