The UK won a record 1,431 investment projects from overseas companies in 2006/7, according to figures published on Tuesday last by UK Trade and Investment which makes it the largest recipient of foreign direct investment (FDI) in Europe and second only to the US.

Showing an increase of 17 per cent over last year, these FDIs have claimed to have created over 36,000 new jobs, and more than 41,000 safeguarded, bringing employment and wealth to every area of the UK.

Key figures from the report include: 600 of the total were new projects, 334 were expansions by existing investors, 47 per cent increase in headquarters operations, to 223 projects, Business services up 122 per cent to 156 projects; financial services up 32 per cent to 99 projects, software and computer services up 82 per cent to 274 projects, Life sciences up 37 per cent to 133 projects, mergers/acquisitions and joint ventures, accounted for 497 of the total number (up by 32 per cent on last year).

David Miliband MP, Foreign Secretary said: "Establishedeconomies continue to be a very important source of FDI for the UK, yet increasingly we are seeing more investments and projects from the high growth economies. Over the next decade, our economy is expected to grow by roughly 25 per cent, while China and India will triple the size of their economies and boast over 40 per cent of world growth. These are compelling statistics which we ignore at our peril and underline the significant potential for targeted UK engagement in these markets."

Meanwhile, on Monday last the latest Financial Services Survey by Confederation of British Industries (CBI) and PricewaterhouseCoopers LLP said the financial services sector enjoyed a third quarter of strong growth, as business volumes increased at their fastest rate in over seven years, but demand and profitability are set to weaken next quarter.

The Survey shows that over the last three months business volumes grew at their fastest rate in seven years, business incomes continued to rise, and employment in the sector increased. However, in what could be an early indication that conditions are turning, the sector expects a tougher quarter ahead, with hardly any growth in business volumes, a modest decline in incomes, and a squeeze on profitability.

In the three months to June, 55 per cent of respondents said business volumes had grown, and four per cent said they had decreased – a net balance of +51 per cent. This was the strongest since December 1999 (+52 per cent) and above expectations (+33 per cent). However, a balance of just +3 per cent expects volumes to grow over the next three months, which is the weakest outlook since September 2004 (+2 per cent).

Volume growth was strong across all UK customer bases, with demand from financial institutions and industrial and commercial companies particularly buoyant. In the coming months demand from both financial institutions and industrial and commercial companies is expected to be sustained, but that from private individuals and overseas customers is expected to slow sharply.

Income from net interest, investment and trading income grew steadily, with a balance of plus nine per cent reporting growth somewhat better than expected in March, although expectations are negative for the coming three months (-5 per cent). Income from fees, commissions and premiums also grew steadily but, likewise, a decrease over the next three months is anticipated (-14 per cent).

Given expected falls in incomes and near-flat volumes, profitability growth in the past quarter (a balance of +8 per cent is expected to be reversed in the next three months, with a net six per cent of firms predicting a fall, representing the weakest expectation since March 2003 (-7 per cent).

Business sentiment strengthened, with a balance of +12 per cent of firms more optimistic about the overall business situation in the financial services sector than three months ago. Job creation remained strong, with a balance of +35 per cent reporting an increase in staff, but this is expected to ease (+28 per cent).

The predicted growth in total costs did not materialise, with a balance of +15 per cent of firms reporting higher costs, against the expected +28 per cent. Cost growth is expected to slow in coming months, with only a net +6 per cent of firms predicting cost growth in the next three months - the lowest in ten surveys. A net seven per cent of firms reported a fall in average costs over the past quarter - the first decline in a year, while staff costs grew more slowly.

Average spreads narrowed sharply as predicted; and the value of non-performing loans, or bad debt, grew for a ninth consecutive quarter, with the balance reporting an increase (+23 per cent) higher than the previous three surveys. Asked about unsecured consumer lending, building societies reported a significant slowing in the growth of loans in arrears over the past three months. Another sharp fall in new loan approvals is expected by banks over the next three months, while building societies expect only a modest decline.

Investment plans for the year ahead remain strong in IT but have fallen back in land and buildings. Looking at what could constrain investment; businesses said inadequate returns, shortage of labour and the cost of finance have all become greater concerns since March – with worries about the cost of finance at a record high (cited by 21 per cent of respondents). Since the last survey, firms have become more worried that domestic competition, regulation and the supply of professional staff will constrain business growth in the coming year.

One-off survey questions about M&A activity revealed that the majority of financial services firms expect levels of activity to continue to pick up. A large proportion of building societies and general insurers think the current increase in financial services M&A activity primarily reflects consolidation within sectors. Looking at future behaviour, all building societies and securities traders, and nearly all banks, consider that M&A activity is likely to be initiated from within their own sectors.

In the longer term most sectors seem reasonably confident about their future business prospects and are pressing ahead with investment plans, especially for IT. Spending on increased efficiency and regulatory compliance remains a key theme in most sectors.

While expectations are high that Merger and Acquisition (M&A) activity will continue to grow, there is an overwhelming consensus that in-sector consolidation will be the most likely driver of new transactions. Interestingly, it is securities traders who take the most bearish view of the future of M&A activity levels, probably reflecting a hesitant outlook from this sector.