Consumer confidence is also weaker, which is manifesting itself in much slower growth in consumer credit and slower demand for general insurance for newly purchased big-ticket items.
Mortgage lending is forecast to stick to a stable, if modest, 3.7% growth this year and next, as competition for new customers, combined with low official interest rates, is keeping the cost of borrowing down and lending criteria accommodative.
There are, however, some upsides. Household income is set to grow at 2% this year, above the 1.6% averaged since 2010, and household savings are expected to go up. We have also seen a modest rise in the proportion of household savings in equities, which could suggest UK households are becoming more comfortable taking investment risks in the face of limited returns on cash savings due to continued low interest rates.
Demographics are driving demand for individual pensions and pensions drawdown products as the UK population aged 65 or older continues to grow.
Should there be a ‘no-deal’ scenario, the EY ITEM Club forecasts GDP growth of just 0.2% in 2020, with the economy suffering a mild recession for a time. A sharp depreciation of the pound would raise inflation and squeeze consumers’ incomes. Exporters would face substantial tariff and non-tariff barriers. And business sentiment would be badly hit, reducing investment.
Even under our assumption that the UK leaves the EU in an orderly fashion, the macroeconomic forecast for the UK and our largest trading partners is not particularly inspiring. In this environment, financial services firms will have to continue planning for sluggish economic growth and continued uncertainty over the future UK-EU relationship. This means no let-up on driving simplification agendas within their businesses, investing in technology to create greater efficiency and reduce costs, and diversifying into new products and services to drive profitability and ensure long-term success. But what can be achieved is limited by ongoing political uncertainty.
Omar Ali, Managing Partner, UK Financial Services, says, “To boost growth, businesses will be looking to the Government for clarity on Brexit and the UK’s future trading relationship with the EU, so that they, alongside consumers, can start to take advantage of rising household incomes, the opportunities – as well as challenges – offered by ‘lower for longer’ interest rates and a hopefully less turbulent political environment.”
- Bank lending to businesses is to slow to just 2.1% in 2020, the weakest rate since 2015
- Consumer credit growth is to slow to 3.8% in 2019, and drop to 2.8% next year, indicating weaker consumer confidence
- Mortgage lending is set to grow 3.7% this year and in 2020, significantly down on the growth rates seen pre-financial crisis
For the full findings, download our forecast.
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