UK Financial Services set to have challenging 2018 but outlook is better than expected

Inflation squeeze predicted to ease but consumer spending likely to be restrained and consumer credit growth set to slow

2018 is set to be another challenging year for UK Financial Services, but the outlook is better than many expected, according to the latest EY ITEM Club outlook for financial services. Although the consumer credit, residential mortgage and business lending markets are all set to have a subdued 2018, the forecast for 2018 and the next few years is better than previously anticipated, due to a stronger than expected economy and the expectation of securing a Brexit implementation period. Inflation is set to fall and interest rates are forecast to rise gradually this year, albeit slowly, and from record lows.

Consumer credit growth to slow for first time in 5 years

2018 is forecast to see annual growth in consumer credit slow for the first time in five years, dropping to 3 per cent and then 2.8 per cent in 2019, as consumers hit the brakes on the amount of debt they hold. This is a fall from the previous highs of 6.9 per cent growth in 2017 and 8 per cent growth in 2016.

The stock of consumer loans is to increase only moderately to £213bn in 2018 (from £207bn in 2017), to £219bn in 2019, £226bn in 2020 and £235bn in 2021. Inflation is forecast to drop to 2.5 per cent this year from 2.7 per cent in 2017, which will ease the squeeze on household budgets, but real disposable incomes are forecast to only rise by 1.2 per cent in 2018, constraining consumer’s spending power. As a result, growth in consumer spending remains subdued, rising by 1.3 per cent, compared to 1.7 per cent in 2017 and 2.9 per cent the year before, as consumers look to rein back their spending.  

Omar Ali, EY’s UK Financial Services Managing Partner, comments: “Although inflation will moderate this year, people are clearly taking a more cautious attitude to spending than in recent years. Whether this is in part a by-product of Brexit uncertainty, regulatory interventions, or because rising household debt is now having a material impact on spending habits, it means that banks should expect to expand lending at a slower rate this year.”