EY ITEM Club Outlook for Financial Services Spring 2015

Winter 2015-16

Outlook for financial services

EY ITEM Club

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The EY ITEM Club expects growth in the UK economy to pick up to 2.6% this year, from 2015’s slightly disappointing 2.2% rate. As in 2015, the consumer is expected to fuel much of this growth, with consumer spending predicted to reach 2.8% this year. Sustained low inflation will support rises in real incomes, while confidence among households and firms should remain high. A stable housing market also contributes positively to support demand for financial services products. Despite this generally bright macro-economic outlook, there are some headwinds that could change the landscape considerably, as our EY ITEM Club Outlook for financial services predicts.

“2015 was the first year for some time in which the underlying economic fundamentals were good enough to support a return to growth across all three main sectors in financial services. Assets under management (AUMs) grew to a record high of £906b, lending to businesses grew for the first time since 2009, and, despite some policy surprises, insurers did not fare too badly across the board either. In my first EY ITEM Club Outlook for financial services as the UK FS Managing Partner at EY, I am delighted to deliver more good news for the sector. Despite concerns about the oil price and the impact of a slowdown in China, the outlook for financial services in 2016 is quite good. ”
Omar Ali
Managing Partner, UK Financial Services
Read Omar’s forecast overview

Welcome


EY - Omar Ali
Omar Ali
Managing Partner,
UK Financial Services

2015 was the first year for some time in which the underlying economic fundamentals were good enough to support a return to growth across all three main sectors in financial services. Assets under management (AUMs) grew to a record high of £906b, lending to businesses grew for the first time since 2009, and, despite some policy surprises, insurers did not fare too badly across the board either. In my first EY ITEM Club Outlook for financial services as the UK FS Managing Partner at EY, I am delighted to deliver more good news for the sector. Despite concerns about the oil price and the impact of a slowdown in China, the outlook for financial services in 2016 is quite good.

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Growth in the UK economy is projected to pick up to 2.6% this year from 2015’s slightly disappointing 2.2% rate; consumer spending is expected to continue growing at a strong rate; sustained low inflation will support rises in real incomes; confidence among households and firms should remain high; and the housing market remains stable. All good news in terms of supporting demand for financial sector products. But alongside this generally bright macroeconomic outlook, there are some headwinds that could change the landscape considerably.

An increase in UK interest rates recedes again

Most public commentary portrays a further delay in the eventual uptick in UK interest rates from their current historically low levels as ‘good news’. However, from the perspective of the UK financial services sector, a rise would deliver something of a welcome boost, by helping established banks and newer faces in the market increase the gap between lending and savings rates, while also opening up the prospect of higher returns for asset managers and insurers. Hopes of a rise over the next few months have proven misplaced, the industry will now be looking for reassurance that there’s an intention to put rates up before this time next year and will be watching the US and the consequences of the Federal Reserve’s rate rise last December with interest.

Consumer credit is running relatively hot

Last year’s cocktail of low inflation, declining unemployment and reviving pay growth proved a useful stimulus to the economy. The 2016 blend looks equally positive for consumer spending, with the added ingredients of further falls in commodity prices and April’s introduction of the Government’s Living Wage. However, consumer spending is also being driven by credit. The last quarter of 2015 saw consumer credit rise by more than 8% year-on-year, reminiscent of pre-crisis growth rates.

The EU referendum

In the face of the current renegotiations and a referendum on the UK’s membership of the EU, the macroeconomic impact of uncertainty is still being hotly debated. For financial services institutions, regulatory uncertainty is increasingly the foremost risk. There are some 40 major financial services regulatory reforms driven by the EU that would be affected by a Brexit, many of which have huge significance and have taken a long time to agree. The scope and scale of the potential regulatory and legislation change means that we all probably need to start to unpack some of the practical and technical issues that might ensue from either an in or out vote, long before we have more certainty.

Policy and regulation: a tale of two cities

On the topic of regulation, there had been concerns that the UK’s increasingly stringent policy regime might have a negative impact on London’s position as a global financial services hub. In the past six months, the Government and supervisory authorities have adopted a less hawkish tone towards the banking sector, and are now very supportive of new entrants and making the UK the home of FinTech. However, asset managers and insurers face a less certain year. The pension reforms continue to play through the system, with the effects of decisions made on flat rate taxes, exit fees and the change to the pensions tax relief limit for high earners yet to really play out. The advice market remains under review, and the asset management industry awaits the outcome of the study by the Financial Conduct Authority (FCA) into value for money and the broader international debate on whether they are systemically important.

An optimistic outlook

By 2016, we had hoped that the effects of the financial crisis would be well behind us. In that context, we might well be slightly disappointed with the outlook for this year. However, given the steady but relatively slow progress made in the last three or four years, we can take comfort that the vital signs are now all back. Things are looking up across all sectors. If we can plot a course through the policy and politics, 2016 looks set to be another good year.

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Download Read the full Winter 2015-16 forecast 883K, February 2016

 

 

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