6 minute read 5 Dec 2019
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How continued uncertainty is impacting financial services

By

Omar Ali

EY UK Financial Services Managing Partner

UK financial services leader. Passionate about making UKFS a great place to work where people can reach their potential. Champion for D&I. Football enthusiast. Bad at skiing.

6 minute read 5 Dec 2019

In its latest outlook for financial services, the EY ITEM Club finds the sustained uncertain economic environment in the UK is impacting growth opportunities for FS firms.

The high-level macroeconomic forecast in our latest ITEM Club forecast paints a familiar picture – the economic environment remains subdued and the outlook for UK growth is weak. But when you look more closely, there are factors which would typically signal positive economic activity: household incomes have enjoyed a period of decent, real-term, growth, which usually leads to more spending; sterling is weak, which commonly results in export businesses investing; interest rates are low and mortgage lending criteria are very accommodative, which normally produces a higher take-up in mortgage lending.

However, in all of these instances, political uncertainty is tempering consumer and business appetite to invest or spend, and further constraining economic growth and the associated opportunities for financial services firms.

In Q4 2019, the economy is not where we had hoped it would be. If you cast your minds back to 2015, the forecasts for 2019 and 2020 were much stronger. Gross Domestic Product (GDP) growth was expected to be around 2.5%.

That isn’t where we are now.

The EY ITEM Club’s latest forecast is based on the assumption that the Brexit withdrawal agreement is ratified by the new 31 January 2020 deadline. This scenario should result in a decrease in uncertainty and some held-back investment projects coming on stream, but it will not dispel all Brexit-related uncertainty, as the UK’s longer-term relationship with the EU still needs to be negotiated. Alongside this, the economic outlook across the eurozone, emerging markets and the US is challenging. As a result, the forecast for UK GDP growth is just 1.3% in 2019 – the weakest rate in a decade – and is expected to drop to only 1% next year.

Record-low interest rates aren’t expected to rise any time soon. Brexit-related uncertainty has led to a continued fall in business investment: Bank of England research estimates that total business investment is around 11% lower than would have been the case had the UK voted to remain in the EU.

The knock-on impact on financial services is material. Growth in business lending has been slower than hoped by about 1 percentage point per year since 2016. This year, firms stockpiling in Q1 as they prepared for a possible ‘no-deal’ scenario ahead of the original Brexit deadline of 31 March 2019, has boosted growth in business lending, but looking ahead to 2020, we anticipate a slowdown in growth of business loans to 2.1% – the weakest rate since 2015.

Growth of business loans in 2020

2.1%

The percentage EY ITEM Club anticipates growth of business loans to slow to next year.

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.” 

Key findings

  • 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.

Read the press release

To boost growth, financial services will be looking to the Government for clarity on the UK’s future trading relationship with the EU.

Summary

Alongside a challenging environment in the eurozone, emerging markets and the US, the forecast for the UK economy is weak, with GDP growth forecast at just 1% in 2020. Political uncertainty is tempering consumer and business appetite to borrow and spend, impacting economic growth and associated opportunities for financial services firms.

About this article

By

Omar Ali

EY UK Financial Services Managing Partner

UK financial services leader. Passionate about making UKFS a great place to work where people can reach their potential. Champion for D&I. Football enthusiast. Bad at skiing.