Lacklustre economic growth in the UK will hit employment prospects in the financial services sector, according to Ernst & Young’s ITEM Club.
In a report published today, the economic forecasting group says it predicts GDP growth of 0.9 per cent this year and 1.5 per cent next year.
It says this weak outlook will have a far-reaching impact on financial services, affecting employment and reducing lending, which will in turn hamper the UK’s recovery.
The ITEM club says that there has only been a modest rebound in financial services employment since the shake-out seen in the credit crunch, with only a third of jobs that were lost having been regained.
In Q2 2011, employment in the sector dropped by 14,000 and the club predicts employment to be broadly flat in 2012.
Dr Neil Blake, senior economic advisor to the Ernst & Young ITEM Club, says: “Given the extent to which highly paid employment in the sector underpins consumer spending, tax revenues and house prices in the UK, the projections for financial services employment is concerning.
“The government has set out to de-risk the sector and make the UK less reliant on it in order to make the economy more secure. Unfortunately, if no other sectors step into the resulting gap, prosperity will go down across the country.”
The club also forecasts that bank loan write-offs will be some £3bn higher over the next few years than it previously predicted due to the weaker outlook for the economy, but Blake says most of this increase will come from non-financial corporate and unsecured household debt.
He says: “Low interest rates and a gentle recovery in house prices means that write-offs on mortgage debt should remain low.”
In addition, the club has cut its forecast for total loan growth over the next two years from 0.8 per cent per annum to 0.5 per cent.
Blake says: “As the financial services sector comes under increasing pressure, the supply of credit to the broader economy slows, which in turn impacts the growth prospects of the wider UK economy.
“Banks may now also face increasing competition for corporate lending from non-bank lenders who are unencumbered by some of the balance sheet restraints that banks currently face.”