The Confederation of British Industry (CBI) has said that financial services firms expect a "squeeze in profitability" in the next quarter in spite of rising business volumes during the last three months.
The Financial Services survey conducted by the CBI and PricewaterhouseCoopers LLP says that business volumes had grown at their fastest rate in seven years adding that employment in the sector was also on the rise.
However it states that while a positive balance of 51 per cent of the firms surveyed reported rising business volumes, only a balance of plus three per cent expected volumes to grow over the next quarter. Such a weak outlook has not occurred since September 2004.
CBI chief economic adviser Ian McCafferty said: "In recent times, the strong performance in the UK financial services sector has given a considerable boost to the rest of the economy.
"In the three months to June, the sector saw another quarter of keen growth, with the volume of business increasing at its fastest rate in over seven years. Job creation and profitability gains have continued, while average costs have fallen."
He added that activity in the sector may be "starting to come off the boil" as the outlook is of flat business volumes, falling income values and lower profitability.
The adviser stated that while this could be a temporary soft patch it could also be a reflection of the "impact on financial markets of recent rises in global interest rates".
The CBI states that while demand from financial institutions and industrial and commercial companies is set to remain strong, a sharp dip in demand is expected from private individuals and overseas customers.
The anticipated falls in incomes and near-flat volumes mean that analysts expect profitability growth in the past quarter (a positive balance of eight per cent) to reverse in the next three months, with a positive balance of six per cent of firms predicting a fall in profits.