UK business lending is likely to contract by almost 2% next year, and by a further 1% the following year, according to a new outlook report from Big Four auditor EY’s ITEM Club.
Spurred by the International Monetary Fund’s (IMF’s) recent decision to downgrade its forecast of the UK’s economic performance in the wake of the landmark Brexit vote, EY’s outlook indicates that the outcome of the EU referendum will impact upon consumer confidence and business investment alike in the short to medium term.
As consumers, corporates and investors await concrete details on both the timetable for the UK’s departure from the EU and the results of negotiations on specific points, EY predicts trends in the coming years of:
In 2017, the auditor says, bank assets will decline to £5.9 trillion, shrinking until 2019 as a weaker economy curtails demand for loans.
Mortgage lending will grow by less than 1% per year on average over the next three years compared with 3% in 2014 and 2015, and the stock of business loans will fall to £376bn by 2019 – a level not seen since 2005.
Although falling demand will impact upon banks, EY notes, their strong capitalisation – with more than £600bn of high-quality, liquid assets, and support from policymakers – means that the sector will be able to weather those conditions.
Turning to asset managers, EY predicts that the prospect of interest rate rises and investors regaining their appetite for risk has been replaced with a likely “prolonged period of low interest rates, volatility in financial markets, and more sluggish growth in household wealth”, following the Brexit vote.
According to the report, assets under management (AUM) are likely to rise by only 1.5% per year between this year and 2019, compared with 7.7% last year, because of heightened investor uncertainty and a deteriorating economic picture.
Fund flows into bonds, the outlook says, are likely to outpace other asset classes, despite slower economic growth, and the prospect that further quantitative easing will suppress yields even further.
While that implies a shift away from equities, cheaper share prices will help support demand so that AUM in equities will recover by 2019.
EY financial services managing partner Omar Ali said: “We had hoped 2016 would be the year that total lending recovered to pre-crisis levels – but with the revised economic outlook, this looks increasingly unlikely.
“While banks are still willing to lend, there is a strong sense of ‘wait and see’ from business and consumers, as they await details of what Brexit will look like in reality.”
However, he added: “The impact of this shouldn’t be blown out of proportion. Mortgages and consumer credit are still forecast to grow – albeit slower than before – and business lending is going to shrink slightly. The industry is in a good place to see through this ‘holding pattern’ period.”