City optimism falling at fastest rate since financial crisis – CBI

Britain’s escalating national emergency over Brexit has led optimism in the financial services industry to plunge at the fastest rate since the financial crisis, according to a business survey.

In the latest warning that the political gridlock over leaving the EU is damaging the economy, the survey of City banks, investment managers and insurance firms from the Confederation of British Industry (CBI) and the accountancy firm PwC suggests companies are the most gloomy since December 2008 – three months after the collapse of Lehman Brothers.

Related: CBI and TUC bosses warn UK faces national emergency over Brexit

The survey of 84 major City firms conducted late last month suggests optimism has not fallen this fast since the months immediately after the government bailed out Royal Bank of Scotland and Lloyds during the credit crunch, when panic spread, prompting banks to stop lending to one another.

Only 10% of firms said they were more optimistic about the overall business situation compared with three months ago, while 53% were less optimistic, leaving a balance of -43% compared with -24% in the final three months of 2018.

Rain Newton-Smith, chief economist at the CBI, said: “The alarm bells ringing at the state of optimism in the financial services sector have reached a deafening level.

“Brexit is now a national emergency. No deal has to be clearly ruled out, then MPs must finally compromise and deliver a solution that protects jobs, livelihoods and communities across the UK.

“It is in absolutely nobody’s interest for the uncertainty to drag on, and continually chip away at our economy and financial services sector.”

The UK’s financial services sector is one of the biggest drivers of growth in the British economy, generating almost 7% of national output a year and employing more than 1 million workers across the country.

Failure to reach a Brexit deal would, however, have potentially damaging consequences for the sector given the close links between the City and the EU, with about a quarter of the UK’s finance industry revenue related to mainland Europe.

Financial services would be one of the hardest hit sectors of the economy in the event of a no-deal Brexit, according to the International Monetary Fund. Analysis by the Washington-based organisation found that finance industry economic output would collapse by as much as a quarter should Britain crash out of the EU without a deal.

City banks have scrambled to relocate activities to the EU to avoid disruption over recent months amid little sign the deadlock in Westminster can be broken.

Research from the capital markets thinktank New Financial estimates that finance firms have shifted nearly £900bn in assets and funds out of Britain to other EU countries as part of Brexit contingency plans. Hundreds of bankers have also been placed on standby to move in the coming weeks.

The CBI and PwC said UK-based financial services firms reported the steepest drop in new business activity since September 2012, while expectations for overall business volumes for the next quarter were the weakest since September 2008.

Despite the growing sense of unease in the boardrooms of the City, the Bank of England believes the finance industry is ready to withstand the worst of the potential fallout from a no-deal scenario.

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Mark Carney, the Bank’s governor, has said the banking sector has become safer over the past decade and now holds about £1tn in cash or similarly liquid assets – as much as four times the level before the 2008 crash.

While this should enable them to continue lending to the real economy in a no-deal scenario, analysts warn trading could be jittery on financial markets, amplifying the shock to the economy.

Vince Cable, leader of the Liberal Democrats, said: “We need to remember that the financial services sector was doing very well. However, there is no doubt that the uncertainty around Brexit and particularly no deal destroyed it.”