New Year cheer: Financial services leaders upbeat for first quarter outlook despite inflation and interest rate concerns

• New research from KPMG UK reveals over eight in ten leaders of financial services businesses are confident about short-term growth prospects
• Inflation and interest rates viewed to be biggest challenges over the next quarter
• Leaders have mixed views on the UK’s future as a global financial centre
• Recruiting and retaining talent, and boosting skills are among the biggest workforce investment priorities in 2024, ahead of mental health and diversity and inclusion initiatives 

3^rd January 2024: Business leaders in the financial services sector are feeling optimistic moving into 2024, according to new research from KPMG UK. The survey of senior executives* working in the sector found that 87% are “confident” when it comes to overall business growth in the first quarter of 2024, supported by a buoyant outlook on profitability for the quarter (83%).

Those working in banking, asset and wealth management are the most optimistic about business growth in Q1 of next year (89%), followed by insurance executives (79%), who continue to face challenges with reinsurance capacity and supply chain inflation.

Inflation and interest rates deemed to be biggest challenges

While a majority (61%) have a broadly positive outlook for the UK economy going into 2024, more than half (56%) believe inflationary pressures will still pose the biggest challenge for their business in the first quarter. This is followed by 46% citing interest rates as the most pressing challenge. While more than a third (37%) believe cost pressures will be their biggest issue, 85% are confident they can manage business costs, such as rising energy bills, throughout the quarter.

Despite ongoing political uncertainty and ongoing conflicts around the world, geopolitical risks were ranked lower than economic concerns, with just 21% believing this will pose the greatest challenge to their business in the first quarter.

“It’s great to see financial services leaders go into the New Year feeling confident despite ongoing economic turbulence, which is set to continue to challenge the sector in the first quarter,” commented Karim Haji, global and UK head of financial services at KPMG. “While on the surface, leaders seem less concerned about the specific impact of geopolitical uncertainty, there’s no denying that it is in part adding to inflationary and interest rate pressures. With interest rates set to stay high in a bid to tackle persistent inflation, combined with the added uncertainty of looming elections in the UK and USA, it will be interesting to see what impact this has on sector confidence beyond the first quarter.” 

Mixed views on the UK’s future as a global financial centre

While a majority of leaders (73%) across financial services are confident when it comes to the view that the UK can maintain its position as a global financial centre over the next three years, perspectives vary between different parts of the sector. 84% of banking executives are confident that the UK can maintain its position but more than half (53%) of insurance executives are not, followed by more than a third (37%) working in asset and wealth management.

Executives point to reducing regulatory pressures, tackling inflation and interest rates, and overhauling the tax system as key areas to address to help the country maintain its position as a leading financial centre.

“Despite changes to listings rules, fewer international firms are choosing to list in London and some UK domiciled brands are looking to list elsewhere. This is creating some uncertainty over the City’s future position as a global financial centre,” said Karim. “As we go into 2024, we are seeing a promising direction of travel from the Edinburgh Reforms package in the bid to boost competitiveness. While the Treasury Committee has highlighted that change is not happening quickly enough, part of the attractiveness of the UK is that our regulatory system is relatively stable. This, together with a plan for enhanced competitiveness will safeguard the UK’s future position on the global stage and boost long-term growth.”