conomists do not have an easy job, particularly at the moment, with economic fundamentals such as borrowing, consumer spending and consumer confidence changing rapidly. I’m afraid the risks to our latest EY ITEM Club Outlook for financial services are to the downside; the forecast is based on the assumption that a Brexit deal will be reached at the end of the year, and that more normal economic conditions will return in 2021 with a gradual relaxation of COVID-19 restrictions, both of which are currently hanging in the balance.
As we fast approach the end of the Brexit transition period, firms don’t yet have a clear view on what a future trading relationship with the EU, and many other significant trading partners will look like, although the progress made in securing a trade deal with Japan is encouraging. Additionally, it’s unclear how long the current lockdown restrictions will last, and what potential future virus control measures there may be.
The headlines from our latest EY ITEM Club outlook are downbeat: despite a bounceback over the summer, the forecast is for a record 10% decline in Gross Domestic Product (GDP) across 2020; unemployment is forecast to rise to over 7.5% early next year; and consumer spending is forecast to fall by 12.8% across 2020. 2021 is set to be better, but both GDP and consumer spending will only partially recover.
The Government continues to provide unprecedented levels of much-needed support to the economy, but rising unemployment and the replacement of the Furlough Scheme with the Jobs Support Scheme, will ultimately reduce the amount of money in consumers’ pockets, which impacts their ability to service existing debt and make new purchases. In response, both the financial services industry and the regulators have put further support measures in place to help customers and businesses with their financial resilience. Rising unemployment and the ongoing challenges faced by small businesses in many sectors will mean the outlook remains testing.
Financial services firms entered this crisis in a position of capital strength and have played a critical role since the UK went into lockdown, giving unprecedented support to businesses and the wider economy. Numbers out from the Treasury on 22 October 2020 show that banks have supported £62b of lending from Government schemes to date. The total stock of bank lending to businesses is forecast to reach £493b at the end of 2020, which is a huge 11% year-on-year increase.
To view this from a different angle, UK firms’ net borrowing this year is expected to be around five times higher than the amount borrowed in 2019, with many firms predicted to only start repaying this debt and reducing their borrowing from 2022. And our forecast shows that banks will continue to lend next year to support business and growth in the UK economy, with the EY ITEM Club predicting business lending growth of more than 5% in 2021.
But the banking sector is facing a multitude of challenges, including squeezed interest margins and increased write-offs on loans. Total business loan losses are forecast to rise from 0.3% in 2019 to 0.4% and 0.5% this year and the next, as some businesses struggle to meet their loan repayments. And new lockdown restrictions could see borrowing levels rise even further, and subsequently the potential for loan losses to increase.