Outlook for financial services
EY ITEM Club
The UK economy has demonstrated remarkable resilience following the shock of June’s vote to leave the European Union. Riding a wave of robust consumer spending, GDP rose by 1% in the second half of the year. As a result, our outlook for 2017 has brightened.
Following the referendum, the EY ITEM Club forecast was just a 0.4% rise in GDP in 2017. This has been revised upwards to 1.3%.
Our EY ITEM Club: Outlook for financial services forecasts slower, but continued growth up to 2020, despite challenges on the horizon from Brexit and other geopolitical pressures.
“This is a key time for the UK’s financial services industry. Brexit and wider geopolitics have injected a level of uncertainty and volatility we have not seen for some years, but the fundamentals of the UK financial services industry remain strong. Lending is predicted to increase, perhaps not as much as we had hoped, but it is still growing. This is good news for the UK as a whole as it means financial services can continue to play an important role in supporting the growth of the wider economy.”Omar Ali
Managing Partner, UK Financial Services, EY UK
Read Omar’s full viewpoint
A brighter, but challenging outlook
UK Financial Services,
Although the uncertainty that followed the UK’s decision to leave the EU last year continues, and will do so for some time, the UK economy demonstrated unexpected resilience in the second half of last year. As a result, the outlook for 2017 is better than expected.
Following the referendum, the EY ITEM Club forecast was just a 0.4% rise in GDP in 2017. This has been revised upwards to 1.3%. However, whilst we won’t see the economy contract, GDP growth is forecast to slow further to 1% in 2018, and will remain lower than 2% for the remainder of the decade. ↓ [... more]
What does this mean for financial services? After what we had come to see as a lost decade of growth after the financial crisis, it is disappointing that the return to stronger growth has been pushed further out but this forecast should be seen as encouraging. The outlook for the UK economy compares well to the forecast for many other developed economies: the US is forecast to grow by 2.3% next year but France and Germany will see their GDPs increase by just 1.5%, Canada 1.7% and Italy a much lower 0.6%.
The context is also important. If in the days after the referendum we had thought we would see GDP growth of over 1% in 2017 or 2018, the unemployment rate hit an 11- year low, long-term interest rates improving and the prospect of base rate rising in the near future, I think we would all have been reassured.
Whilst the outlook has improved, there are still challenges ahead and second-order impacts to be considered. Not least of these is the return of inflation.
The return of inflation
The industry has operated in an environment of low inflation for the past several years, and more importantly, so have consumers. But this is changing. Following the devaluation of sterling, inflation is set to climb to nearly 3% this year. Combined with weakening growth in job creation and wages, higher inflation will lead disposable incomes to fall by 0.3% this year. It doesn’t sound much but this is worth £3b to the economy, which will have an impact on demand for financial products.
Slowing growth will not have a uniform effect across financial services Weaker real incomes will hit consumer credit. Mortgage lending growth is also expected to drop from 4.4% in 2016 to 1.4% this year and demand for business lending is expected to fall. Overall lending will continue to increase but banks will need to think about the economics of their loan books. In the longer term, the prospect of an increasing base rate will give banks hope that they will finally be able to widen the gap between lending and savings rates.
A slowing economy will dampen demand for big ticket purchases, impacting general insurers. As a result, the growth in non-life premium income is forecast to slow to 2.3% in 2017. Life insurers, buoyed by climbing interest rates and an improved outlook for equities, will fare better. Premium income is forecast to rise by an average 3.5% until 2020.
Asset managers had a relatively good year last year; the fall in sterling boosted the value of UK equities, which combined with healthy growth in household wealth, saw the total assets under management (AUM) in the sector climbing 12.3%. Whilst we won’t see the same level of growth this year, cheaper sterling and resilient investor sentiment will buoy share prices and equity funds and mean that total AUM should still grow.
We should have confidence in UK financial services
Despite all the uncertainty, the economy is holding up. Although growth will slow, the outlook is brighter than six months ago. In this environment, the UK’s financial services industry is set to perform relatively well. The EY ITEM Club forecasts that the domestic insurance market will see a combined total premium income of £271b, total bank lending will stand at £6.2t, and AUM should reach £1.1t in 2017. For AUM alone, that’s 18% bigger than even two years ago.
The talent, knowledge and experience we have here, plus the depth and breadth of our capital markets will continue to drive global demand for UK financial services. Brexit and wider geopolitics have injected a level of uncertainty and volatility we have not seen for some years but the fundamentals of the UK financial services industry are solid.
Hopefully the benign economic outlook will give the industry the confidence to continue to invest in the future of the industry, cement the UK’s lead in FinTech, invest in solutions that make financial services easier to access and understand for the UK consumer, and help us to keep the UK industry at the forefront of the global market.
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