The financial sector endured a painful first quarter of 2008, with higher operating costs and a sharp fall in profitability, and gave a gloomy outlook of rising borrowing costs and job cuts for the coming six months.

Almost 50 per cent of the companies questioned for the CBI’s financial services survey, carried out in conjunction with PricewaterhouseCoopers, reported a fall in business volumes that was worse than expected. Close to 20 per cent said that profitability was down, while 25 per cent had cut jobs during the quarter. Employment expectations for the coming three months were the bleakest since December 2002.

The Bank of England has been providing an extra £5 billion each week at its cash auctions for Britain’s banks, but Ian McCafferty, the CBI’s chief economic adviser, said that this would not solve the fundamental problem of the lack of trust in the financial markets that was plaguing companies. As a result, banks had refused to lend to each other and lending to other businesses has slowed dramatically.

“It’s clear that the credit crunch has worsened over the first three months of this year,” he said. “The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened.” He predicted further tough times for the financial sector.

Companies said that their plans for spending on IT were flat and expenditure on land, buildings, vehicles, plant and machinery were the lowest since June 1992. Almost 10 per cent of respondents predicted that lending to industrial and commercial companies would decline in the next quarter.

Credit spreads were reported to have widened strongly by 35 per cent of the companies surveyed – the biggest gap since March 1993.

Continued funding difficulties meant that respondents were more pessimistic about the credit crunch than they had been in the final quarter of 2007.

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