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Bank to business lending is forecast to contract sharply in 2023 while mortgage lending will grow at its slowest pace since 2011 as fears of recession intensify, economists have predicted.
According to the latest forecast from EY Item Club, an economic forecasting group, bank to business lending is expected to contract 3.8 per cent this year – one of the sharpest falls in decades – before returning to growth in 2024.
Borrowing demand is expected to weaken as firms, both large and small, face multiple pressures from higher costs of servicing debt, lower earnings and continued global supply chain disruption.
“With more than 70 per cent of corporate bank loans on variable rates, UK businesses are likely to be affected in the short term by increases in interest rates,” Dan Cooper, UK Head of Banking and Capital Markets at EY, said.
“SMEs are currently more vulnerable to a rise in loan impairments than larger businesses as they are less able to insulate themselves against higher rates and also because of the volume of bank debt they hold, which has grown since 2019,” he continued.
UK mortgage lending meanwhile is expected to grow very slowly, at just 0.4 per cent in 2023 – the slowest rate since 2011. This is expected to increase to 1.4 per cent in 2024.
EY noted that this was a result of both supply and demand factors. Banks are expected to tighten their mortgage lending criteria as a result of a challenging outlook and falling house prices while demand will fall on cost of living pressures and higher interest rates.
“A contraction in net business lending and general downturn across the housing market looks inevitable, and an increase in loan defaults seems unavoidable,” Cooper commented.
Demand for consumer credit, however, is forecast to rise 4.8 per cent this year before rising 5.3 per cent in 2024.
This represents a rebound from the pandemic period over 2020 and 2021, when consumer credit fell by over 10 per cent.
While falling real incomes may weaken demand for big ticket items, which are often funded by borrowing, a recovery in the economy in the second half of this year is likely to boost consumers’ confidence in using credit, EY noted
Anna Anthony, UK Financial Services Managing Partner at EY commented: “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.”