Net lending to UK businesses will fall back and stagnate over 2018 and 2019, before slowly climbing back up again at the end of the decade – that’s according to Big Four auditor EY.
In its new Outlook for Financial Services: summer 2017 report, EY’s special Independent Treasury Economic Model (ITEM) Club points out that, despite exceeding many forecasters’ expectations in H2 2016, economic growth has put in a weaker performance since the beginning of this year.
GDP expanded by 0.3% in the first quarter of 2017, compared to 0.7% in Q4 last year.
While the rate of expansion appears to have picked up in Q2 2017, “headwinds from elevated inflation and political uncertainty point to a relatively sluggish period of economic growth, by historical standards”.
As such, EY expects that lending to businesses will roll back marginally from £425bn this year to £424bn next year, before gradually climbing to £427bn in 2019 and then £435bn in 2020.
Published in partnership with think tank Oxford Economics, the report says: “Although business investment rose in Q1 2017, the increase was modest and followed a sharp fall at the end of 2016, with Brexit-related uncertainty potentially playing a role in this weakness.”
It explains: “This year, record corporate profitability, low interest rates on corporate borrowing and companies’ high level of cash balances offer some reasons to be optimistic.
“But headwinds from the weaker consumer spending power, and uncertainty stemming from the UK’s ultimate Brexit destination, mean that we still expect investment to broadly stagnate this year and next.
“However, the assumption of a more transitional Brexit deal points to a bounce-back from 2019 onwards.”
Meanwhile, the report notes, “the conclusion of the Bank of England’s programme of corporate bond purchases in April, and the removal of the support this offered to the bond market, should reduce the relative attractiveness of bond finance and may see some shift in business financing towards bank loans.
“Interest rates on corporate lending being at historically low levels should also support demand for bank financing relative to bonds. The average interest rate on a new corporate loan was just under 2.4% in April compared to 2.8% 12 months earlier and almost 7% just before the financial crisis struck.”
It adds: “Since our last forecast, we have factored in a transitional Brexit deal, and that means that the outlook for business lending is positive. The stock of lending to firms is forecast to rise 4.4% this year compared to 4.9% in 2016, before stagnating in 2018.”
In a statement, EY UK financial services managing partner Omar Ali said: “Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country.
“Business lending, mortgage lending and general insurance look set to be the hardest hit. Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit.
“A return to mortgage and business lending growth is forecast for the latter stages of the decade, but this does depend on the right deal being struck with Europe.”