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Ian McCafferty, CBI chief economic adviser, said that it was clear that the credit crunch had worsened over the first three months of this year.

The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened.

"While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust, so that credit markets are unlikely to return to anything like normality for some time to come,” McCafferty added.

He explained that even when they do, we will not see a return to the very favourable lending conditions that existed before August.

"We can expect further tough times in the financial sector, and as this feeds through into the wider economy it will inevitably be felt through slower economic growth this year and next," McCafferty said.

Banking

Business in the banking industry was well below normal in volume terms.

Banks' volumes fell at their fastest pace since September 1991, while their income also fell strongly, (that from fees and commissions at the fastest rate since this survey began in 1989).

Banks managed to widen spreads, and plan to do so again, while non-performing loans showed only a marginal rise.

Even so, profitability fell, and banks have begun seriously pruning staffing levels, with the fastest fall in numbers employed since September 2000.

Investment intentions have also turned negative, even for information technology, on reduced inclinations to expand capacity, reach new customers and provide new services.

Building societies

Building Societies increased their spreads and their volume of business – though the latter was still well below normal - and hence were able to lift profitability this quarter.

They were less optimistic than they were three months ago, however, as they expect the volume of business to contract very strongly next quarter, with some limited downward pressure on spreads.

As a result, while there was an unexpected uplift in the trend in profitability this quarter, societies expect this to be transitory.

Even so, they still plan to invest much more on IT in the coming year, as well as much more on regulatory compliance.

Andrew Gray, UK banking advisory leader at PricewaterhouseCoopers LLP, said that banks were increasingly concerned about the economic outlook for the second half of 2008.

“While there are some signs of optimism, the markets remain fragile. Although banks have seen their funding costs stabilise, liquidity is still tight and market conditions have left them reluctant to lend to each other, commit to capital spending and invest in new services or customer acquisition,” he added.

Gray pointed out that many banks are predicting staff levels to decline, although evidence suggests these reductions will be reasonably modest.

“Despite market conditions and a mortgage demand slowdown, building societies remain quietly confident in their ability to fund and manage their business. Although activity is expected to slow and the availability of funding to limit new business growth, spreads have widened and the sector's improved sentiment is reflected in the strength of IT and staffing investment plans.”

General insurance

Business volumes grew at their strongest rate since June and are expected to do so again next quarter, while the level of business was considered to be well above normal.

Profitability grew very strongly this quarter, reflecting much higher spreads and a big fall in average transaction costs, as well as the growth in business.

The big fall in average transaction costs and bullish projections for IT investment in the year ahead suggest greater use of the internet to transact.

General insurers also expect that the strong growth in profitability will continue next quarter.

Life insurance

Life companies’ optimism collapsed, as while volumes of business, incomes, value of new business and profitability all fell, they expect all of these trends to accelerate next quarter.

Numbers employed fell heavily and are expected to do so again next quarter.

Looking forward to the coming year, life companies expect to spend much more on regulatory compliance, and more on marketing, but they are intending to authorise less capital expenditure than in the past year.