UK business lending to contract sharply this year

Bank to business lending is expected to contract 3.8% (net) this year, representing one of the sharpest falls in a decade, according to the latest EY ITEM Club for Financial Services Forecast. The fall is largely due to the deteriorating economic environment reducing demand and a rise in borrowing costs.

The outlook for business lending is set to improve next year as the economy begins to recover. However, growth remains subdued, and only 0.9% net growth is forecast in 2024 as businesses, especially SMEs, continue to deal with the economic shocks of recent years.

Demand for mortgage lending is also set to be affected this year, as the housing market faces multiple headwinds. Cost of living pressures, falling real household incomes and rising interest and mortgage rates mean only 0.4% growth is forecast this year, which is the lowest rate of mortgage growth since 2011. Slightly higher growth of 1.4% (net) is forecast in 2024.

At the same time as market demand wanes, banks are expected to tighten their mortgage lending criteria as a result of higher interest rates, a challenging outlook and falling house prices.

On the consumer credit side, growth of 4.8% is forecast this year, increasing to 5.3% in 2024. While falling real incomes may to some extent weaken demand for big ticket items often funded by borrowing, a prospective recovery in the economy in the second half of this year is likely to boost consumers’ confidence in using credit.

Anna Anthony, UK Financial Services Managing Partner at EY, comments: “The series of economic shocks in recent years and the current cost of living pressures are having a significant impact on both households and businesses. Those most affected are the vulnerable in society and small businesses which may have limited financial cushions of support to fall back on. Stretched affordability will affect loan demand across all fronts and banks should be preparing for low and, in some cases, negative lending growth rates. Banks also face the prospect of the number of loan defaults rising amid the economic downturn. However, default rates are expected to be much lower than recorded after the financial crisis, and given the sector’s much higher relative level of capitalisation, banks are in a strong position to help consumers and businesses through this difficult period.

“While the economic environment is likely to be tough over the next few months, economic conditions are expected to improve over the course of 2023. This is likely to have a positive impact on consumer and business confidence – and lending growth – as we head into 2024.”

Business lending to contract this year due to challenging economic environment

While bank lending to businesses soared during the pandemic as businesses utilised state-subsidised lending schemes (in 2020, growth sat at 8%), and grew in 2022 (3.7%), this year it is forecast to fall into negative territory by almost 4% (-£18.8bn). Borrowing demand is expected to weaken as firms – both large corporates and SMEs – face multiple pressures from higher costs of servicing debt, lower earnings and continued global supply chain disruption.

2024 should see growth in net lending to firms resume as high inflation eases and the economy starts to recover. However, it is likely to be sluggish, and the EY ITEM Club forecasts low growth of 0.9%, equating to net lending of £4bn, reflecting the dama