UK firms’ optimism falls with EU trade deal pending

With no certainty that Britain will get a deal from the European Union to its liking with regard to trade and financial services, optimism in London’s financial district (the ‘City’) is at present lower than at the time of the global financial crisis, according to a survey carried out by the Confederation of British Industry (CBI) and accountants PricewaterhouseCoopers (PwC).
The quarterly survey of 81 financial services firms, which was carried out before the UK agreed a deal on transition arrangements with Brussels shortly before the end of last month, showed optimism fell for a fourth consecutive quarter at start of this year and has declined in eight of the last nine quarters.
The gloom that engulfed the sector during the financial crisis has now been surpassed by the negative sentiment regarding Brexit, the CBI said.
Researches found that sentiment in banking continues to deteriorate, as did the mood among investment managers.
Just 7 per cent of firms told the survey they were more optimistic about the overall business situation compared with the previous quarter. By contrast 24 per cent of firms were less optimistic. As CBI chief economist, Rain Newton-Smith said: “There is no escaping the rather large elephant in the room. Optimism has been flat or falling for over two years now — that’s nine quarters — something not seen since the financial crisis.
Head of financial services at PwC, Andrew Kail, also warned the transition period after March 2019 — which will keep Britain loosely in the EU until December 31, 2020 — “may not be sufficient to prevent companies planning for a hard Brexit until the shape of the landscape after 2020 becomes clearer.”
Despite the CBI’s best efforts to suggest the transition deal should give companies greater confidence about Brexit and perhaps encourage them to put off contingency plans, its hard to see how or why they would, given how negative they feel about the prospects for themselves and the City overall.
If this sentiment carries forward into the next few quarters, it will begin to be looked upon as a reflection of how businesses think the Brexit negotiations — and the government’s handling of those negotiations — is going. This isn’t to say sentiment won’t lift in the coming quarters as a result of the transition deal. Brexit Minister, David Davis certainly thinks so. His upbeat assessment of negotiations last week saw him conclude that it is “incredibly probable” a trade deal will be achieved.
But there is now only a year to go until Britain takes its first steps outside the EU and sentiment remains broadly negative. The City does not share the Brexit minister’s confidence or his optimism. Given the number of lobbyists employed by City firms — and therefore the amount of contact most of them have with government — that should be worrying.
And until, or unless confidence is restored, the threat that businesses will leave the financial district and take their jobs and investment with them remains very real and ever present.
The question is, what can be done to restore confidence. It appears, not very much until further negotiations. Whatever the belief among ‘Remainers’ that their Brexit-backing rivals cheated during the 2016 referendum, the result stands, the government remains committed to departure and the country is still bitterly divided over the issue.
It seems businesses must try to navigate the changing landscape as best they can in the year ahead. For some it will ultimately mean leaving the financial district.
As it is, more than a fifth of City firms have already admitted they will move at least some operations out of the UK as a result of Brexit.
A Brexit tracker from professional services giant Ernest Young showed 46 banks, insurers and asset managers intend to move either staff or operations to the continent.
Brexit minister has said the UK could withhold its multi-billion pound ‘Brexit bill’ if Brussels does not agree to a wide-ranging free trade deal.
However, negotiations with the EU did take a step forward when it emerged the bloc was willing to give the UK “appropriate” market access based on “reviewed and improved equivalence” rules.
The City has welcomed the marked change in tone from Europe but warned that the EU’s current negotiating guidelines do not go far enough; it needs more to be done.
(The author is our foreign correspondent based in the UK. He can be reached at