The question for firms to grapple with is, how much of this is down to confidence and how much is down to structural changes in consumer behaviour?
One indicator of increased consumer confidence is a rise in the proportion of household wealth held in investments, rather than currency and bank deposits, which suggests consumers may be more willing to take investment risks.
Consumer confidence is therefore improving, but behaviour which drives demand for traditional products and services is changing.
Looking at two key drivers of consumer borrowing, we can see longer-term fundamental changes at play. The motor sector is continuing to face several structural shifts including a declining demand for diesel vehicles and the growing use of ride sharing services. In addition, we know that environmental and sustainability concerns are also deterring consumers from buying a car. Motor finance accounts for around a third of the stock of consumer credit, and so the impact of these changing consumer behaviours on potential growth should not be underestimated.
In the housing sector, low mortgage rates and accommodative LTV ratios should be driving growth but affordability remains the key challenge. In Q3 2019, the average house price was equal to 4.7 times the average borrower’s income, close to a record high. Although wages are forecast to rise by an average of 3.5% over the next few years, house prices are forecast to grow at a similar pace, meaning that the challenge of affordability is not going away anytime soon.
The story for businesses is different. Business investment, and resultant business lending, continues to be weak. Brexit-related uncertainty has contributed to subdued growth in business lending, which has averaged a modest 4% since 2016. This year, businesses face new uncertainty over whether the UK and EU will arrive at a trade deal before the end of the transition period, and under what terms. The new Government’s commitment to infrastructure spending will buoy confidence but the risks businesses are now facing extend beyond Brexit and the UK; the impact of climate change, global geopolitical uncertainty and the (as yet unknown) economic impact of the coronavirus, will be weighing on their minds as they consider whether and where to invest. As a result of these pressures, and continued competition from “non-bank” finance, the EY ITEM Club forecasts muted business lending growth of 3.4% in 2020.
A good Brexit outcome will continue to lay positive foundations for future growth, but there are deeper, structural changes to consumer behaviour and important emerging trends in both consumer and business finance which the industry needs to tackle.
In this context, financial services need to reconsider the role they will play in helping their business customers to navigate change. They have put the customer first in their response to Brexit and now need to do the same on climate change, trade and geopolitical unrest. Those firms that do this well will be in the best position to compete with “non-bank” sources of finance and to continue to attract new customers.
- Consumer credit growth is forecast at 3.2% for 2020, the lowest in six years, down from 3.7% in 2019
- Overall mortgage lending growth is only forecast to rise 4.1% this year, close to the average of the last five years
- Bank business lending is forecast to grow at a subdued 3.4% this year, as investment grows only modestly, and firms continue to look at alternative forms of finance
For the full findings, download our forecast
Read the press release