The UK economy’s stronger-than-expected performance in 2023 is driving an upgrade in UK bank lending forecasts for both households and businesses, according to the EY ITEM Club.
Forecasts have been revised to show a 1.2% rise in total loans this year, a significant upgrade from the 0.1% fall forecast in February. This equates to a net increase of £29bn, contrasting sharply with the initially predicted £2bn net decline.
Economic indicators such as falling inflation, lower-than-expected energy bills, and a resilient jobs market have contributed to a revised GDP growth estimate of 0.2% in 2023, instead of a previously forecasted contraction. These factors are expected to encourage an increase in both consumer and business borrowing.
Net mortgage lending is projected to grow 1.2% in 2023, a rise from the 0.4% predicted earlier in February, reflecting an increase in housing market activity. However, this growth rate remains below the 3% average seen in pre-pandemic years (2015-2019), primarily due to rising interest rates.
The EY ITEM Club’s revised forecast also predicts a 6.5% rise in unsecured lending in 2023, up from the 4.8% predicted in February. Despite this, bank-to-business lending is still expected to contract this year, albeit at a lower rate of 0.8% net, a significant improvement on February’s -3.8% forecast.
Anna Anthony, UK financial services managing partner at EY, said: “We are in a more optimistic place than we were a few months ago. The recession that many thought was inevitable is now likely to be avoided and energy prices have fallen, boosting consumer and business sentiment. Despite recent volatility in the global banking sector, the EY ITEM Club has been able to upgrade its growth forecasts for UK bank lending this year, which is positive news.”
Despite these encouraging signs, Anthony also cautioned that “enthusiasm should be measured, in the short-term at least. UK banks continue to face a tough environment with historically low lending growth rates.”
The EY ITEM Club also forecasts an uptick in mortgage approvals, anticipating a rise of 1.2% this year and 1.8% in 2024. Similarly, consumer credit is expected to rise 6.5% this year, thanks to the fall in UK energy prices and an increase in discretionary consumer spending. Meanwhile, business lending is set to contract this year, though at a slower pace than previously forecasted.
The EY ITEM Club also predicts an increase in write-off rates across all forms of bank lending in 2023, albeit at a level far lower than those seen after the global financial crisis. Write-off rates on consumer loans are expected to rise, but a strengthening economy should mitigate a sharp rise in impairments.
Dan Cooper, UK head of banking and capital markets at EY, added: “While an increase in loan defaults is still looking likely across all lending fronts, the increase is lower than we expected three months ago. UK banks are in a strong capital position, bolstered by the expected rise in total loan growth, and will be able to absorb a higher level of losses. Banks will still need to continue to manage their balance sheets carefully, but they are well placed to deal with whatever challenges lie ahead.”
