Economists see signs of growth for financial services sector

In its Spring Forecast (14-page / 2.4MB PDF), the Ernst and Young ITEM Club said that it was "optimistic about longer-term prospects" for the financial services sector, despite continuing recession in the major European markets.

The group said that the equities market had been "relatively stable" since its last report, despite international events including the bailout of the Cyprus banking system and disagreements on fiscal policy in the US.

"If any of these events had happened last year when investors were more nervous about the resolve of policy makers and the durability of the recovery in the global economy, the market reaction would undoubtedly have been more severe," the report said.

"We view this as further evidence that the risk environment is starting to return to more normal conditions," it said.

Among their conclusions, the group predicted that lending to UK businesses would increase this year for the first time in four years. The group forecast a rise of around 3%, which would then rise to almost 8.5% by 2014. The Bank of England's Funding for Lending scheme, was extended this month to include finance houses, leasing firms and asset finance groups, would have an "increasingly positive" impact on lending over the next year, ITEM said.

The report said that the market remained "challenging" for life insurance businesses, due to both slow economic recovery and uncertainty around changes to the regulatory regime. In particular, ITEM noted impending changes to solvency requirements at an EU level, and a ban on commission payments to advisers under the Retail Distribution Review (RDR), which came into effect at the end of last year. However, the report predicted "moderate growth" for insurance premium income over the next two years with larger increases leading up to 2016.

Financial services expert Martin Bishop of Pinsent Masons, the law firm behind Out-Law.com, said that the ITEM Club's conclusions reflected an increase in optimism in the sector.

"2012 was a very slow year, with lending levels significantly down," he said. "However, activity has certainly increased in the first quarter of 2013."

"At a recent debt conference hosted jointly by Pinsent Masons and Livingstone Partners, this experience was a common theme from attendees comprising a mixture of people from the UK clearing banks, credit funds, private equity houses, corporate borrowers and their advisers. It may be that, this time, the 'green shoots' are more than a mirage," he said.