Cracks are beginning to appear in Scotland’s previously solid financial services industry as it suffered the biggest ever fall in quarterly output.

The Scottish government hasn’t exactly been quick out of the blocks to report the slump, only just revealing that financial services suffered an 8.4% decline in the first three months of 2008.

The biggest driver of this was the banking sector, which slipped by10.9% in Q1 – and this was before the announcement of Royal Bank of Scotland’s £691m and HBOS’s bungled rights issue.

John McLaren, of the Centre for Public Policy for Regions, reckons the picture for financial services in Scotland going forward is “worrying and confusing”.

“Financial services continues to contract in Scotland while seeing strong growth in the UK,” he says. “Since 2007 Q1, this sector has declined by over 10% in Scotland and grown by 12% in the UK.”

Part of the problem is trying to find good statistical data on the Scottish market, which is usually lumped together with the UK as a whole, reckons McLaren.

So far, any wide-spread redundancies have yet to occur north of the border, and analysts tell us that the big two banks are likely to hold fire in the short-term.

However, HBOS has just announced 425 job cuts across the UK and is set to close one of its five mortgage brands.

A recent report by Inverness-based Mackay Consultants predicts there could be 400-500 job cuts at RBS and HBOS by year-end in Scotland.

Scottish Financial Enterprise says: “Scotland’s financial services operates in a global environment and as such it has felt the impact of difficult conditions the industry is experiencing worldwide.”