Financial and business services firms in City of London had been expected to expand to stave off return to recession
The surprise fall in output at financial and business services firms in the City of London and beyond has wrongfooted a raft of economists who had been expecting the most powerful part of the UK economy to have expanded sufficiently in the first three months of the year to stave off a return to recession.
Not only did business and financial services output fall by 0.1%, but, within that performance, the vast financial services subsector – including banks, building societies and insurance firms – "made the largest negative contribution", according to preliminary estimates from the Office for National Statistics.
Ross Walker, an economist at Royal Bank of Scotland, said: "This is the key sector: 29% of GDP. Financial services, in terms of corporate and wholesale banking, had [until now] seemed to have a decent first quarter."
While the last six months of 2011 had been characterised by mounting fears of an unravelling eurozone, the intervention of the European Central Bank in December, offering struggling banks emergency loans, had been taken by many as marking a turning point.
"There was a rally in equity markets at that time," recalled Walker, "And there was a verve about the first quarter in terms of the financial sector – certainly that was the feeling anecdotally." He also noted that a number of US banks, which report on a quarterly basis, had posted figures adding to the impression of an embryonic recovery gathering momentum.
The surprise dip in financial services output comes a month after an extensive sector survey for the Confederation of British Industry and PricewaterhouseCoopers found evidence of "a strong recovery in confidence". The survey said: "The improvement reflects continued growth in volumes of business, calmer financial markets and more stable economic forecasts. The outlook for employment [in the sector] has also picked up significantly. Firms are focusing on their plans for growth."
John Hawksworth, chief economist at PwC, yesterday admitted the fall off in financial and business services was "surprising" and "a little bit at odds with some [recent] data".
David Kern, chief economist at the British Chambers of Commerce, said: "It [The figure] is very surprising. The ONS figures in many areas are not in agreement with a wide range of business data. I think we should wait a little and see if we will get some additional information. All I can say at the moment is that it's very puzzling."