- Bank lending to business is predicted to increase by just 2.1% in 2020, representing the smallest increase since 2015 (£9.5bn)
- Consumer credit growth of 3.8% this year expected to be the slowest for six years and is predicted to cool further
- Mortgage lending set to grow 3.7% both this year and 2020, significantly down on the growth rates seen pre financial crisis
Bank lending to business is predicted to grow by just 2.1% in 2020, equating to £9.5bn – the weakest growth since 2015 – according to the EY ITEM Club Outlook for financial services. Compounded by a dampened appetite for business investment in the years following the Referendum, future growth forecasts are set to remain low even if the Brexit withdrawal deal is ratified early next year.
Demand for other forms of bank lending also continues to slow, despite reasonably healthy real household income growth of 2% this year and 1.7% in 2020. Consumer credit is forecast to grow by 3.8% this year, which would be the weakest performance since 2013 and significantly down from the recent peak of 8.3% in 2017. On the housing side, mortgage lending growth remains slow and stable. It is forecast to grow at 3.7% both this year and next. Though better than in recent years, it remains well down on pre-financial crisis rates despite historically low interest rates and favourable mortgage lending terms. More concerning is the proportion of new mortgage lending at loan to value ratios at or above 90% reaching a new post-crisis high of 18.7% in Q1 2019.
Omar Ali, EY’s UK Financial Services Managing Partner, comments: “With households experiencing some levels of income growth, we’d normally expect to see stronger forecast figures. Brexit, the global economic environment, and broader political uncertainty is resulting in many consumers and firms holding back on big spending plans. Even if the withdrawal deal is ratified early next year, this won’t get rid of the uncertainty entirely as the UK’s future relationship with the EU will still need to be worked out. For firms relying on trade with the EU, this is likely to hold back their spending and, in turn, their appetite for credit. For consumers, it may mean they’re less likely to splash out on big ticket items like buying a house or car.”
Low business borrowing forecast, even with a Brexit deal ratified early next year
With continued Brexit and wider political uncertainty, along with increasing global economic headwinds, the forecast suggests that many businesses are holding off on their investment plans until they have a better understanding of where things stand. This would appear, in part, to be behind the slowdown in lending to large companies and SMEs. Looking ahead, with negotiations on the UK’s future relationship with the EU still to come, uncertainty looks likely to continue to weigh heavily on businesses’ appetite for credit. Even when assuming a Brexit deal is ratified early next year, the EY ITEM Club Outlook for financial services predicts a slowdown in lending growth to just 2.1% next year – the weakest rate since 2015 – followed by a recovery to 3.4% in 2021 and 3.5% in 2022.
Demand for consumer credit at its lowest point for five years
While consumers should benefit from a combination of low inflation and reasonable pay growth, with Brexit uncertainty continuing, the growth in demand for consumer credit is set to slow. The EY ITEM Club Outlook for financial services says that consumer credit is forecast to grow by 3.8% this year, the weakest performance since 2013 and significantly down from the recent peak of 8.3% in 2017. Weak demand for new cars is a root cause, depressing overall consumer credit growth. October’s 6.7% drop on a year earlier for new car registrations was the biggest fall in thirteen months. This may partly be due to political uncertainty deterring some people from making large purchases, but larger structural shifts are also at play. Notably the declining demand for diesel vehicles and a fall in car ownership among young people which is likely to impact demand for cars and associated finance in the longer-term.
On the supply side, although interest rates on consumer credit have remained stable in recent months, there has been some tightening in credit conditions in the unsecured lending market. Having run at 5% in 2018, the growth in stock of consumer credit is forecast to slow to 3.8% this year and just 2.8% in 2020.
More slow but stable mortgage lending growth
Mortgage lending growth is forecast to remain steady but slow, increasing 3.7% both this year and in 2020, before rising to 3.8% in 2021 and 4% in 2022. Although mortgage lending terms are still flexible and interest rates are likely to hold firm over the next year at least - meaning mortgage rates will stay close to their current record lows - it is unlikely this will boost demand. Brexit uncertainty appears to be holding back people’s desire to commit to such a big purchase and affordability remains a key obstacle. Despite sluggish growth in house prices, in Q1 2019 the average house price was equal to 4.7 times the average mortgage borrower’s income, close to a record high.
Challenging time ahead for insurers
Although household income is expected to grow 2% this year in real terms, a weak car market and political uncertainty is weighing on insurers. Low interest rates will also hamper insurers’ ability to generate profit growth, and the FCA’s concerns on pricing practices is also set to disrupt the industry. In addition, a change to the Ogden personal discount rate for injury claims announced in the summer was less than expected, impacting profitability, and motor insurers are also having to contend with a shrinking market. New car registrations are declining; October’s 6.7% drop on a year earlier was the biggest fall in thirteen months and on a rolling twelve-month basis, the 2.4 million new cars sold in the twelve months to October 2019 was close to the lowest in six years.
As for home insurers, the housing market has remained subdued. Housing transactions are an important driver of big-ticket, and insurable, household purchases. The 0.6% fall in housing transactions in Q3 2019 continued a declining trend that began at the start of 2018. Overall, the EY ITEM Club Outlook for financial services shows non-life premium income growing 2.3% this year, down from 3% in 2018, and then 1.9% in 2020.
AUM expected to rally this year, but soft by recent standards
Following a sharp drop in markets at the turn of 2018-19, a recovery in asset prices and a weak pound - reflecting Brexit-related uncertainty – have both helped to boost the value of UK Assets Under Management (AUM). The FTSE All-Share Index ended Q3 2019 11% above its level at the close of last year, albeit still below the average over 2018. The pound dropped 2.6% against a basket of currencies over the same period, boosting the sterling value of overseas assets managed by UK asset managers. As a result, following a 5.3% drop in the value of AUM in 2018, this year is forecast to see that drop more than offset by a rise of 8.9%, taking AUM to £1.16tr. Growth in subsequent years is expected to be broadly in-line with cash growth in the UK economy, averaging around 4% from 2020-22.
Omar Ali concludes: “Financial Services Firms have had to deal with a decade of weak economic growth and low interest rates. With rates unlikely to rise over the next year at least, the FS sector will continue to face profit challenges. This means Firms will need to re-assess their business models, consider diversification and look at what technologies they can introduce to help reduce costs and drive better customer experiences. The decisions they make now will be pivotal not only to their own future, but also to that of the UK and its global position in Financial Services well beyond Brexit.”