Business borrowing is expected to have risen five-fold in 2020, while loan losses are set to increase, new analysis has shown.
According to the latest EY ITEM Club outlook for financial services, consumer credit is predicted to fall by 5.6 per cent by the end of 2020 – the biggest decline since 2011. Bank lending is set to reach £493bn by the end of the year – an 11 per cent year-on-year increase.
Meanwhile, gross domestic product (GDP) is on course for a record 10 per cent decline across 2020, while unemployment is forecast to rise to over 7.5 per cent early next year and consumer spending is forecast to fall by 12.8 per cent across 2020, the report concluded.
“Financial services firms entered this crisis in a position of capital strength and have played a critical role since the UK went into lockdown, giving unprecedented support to businesses and the wider economy,” said Omar Ali, UK financial services managing partner at EY.
“UK firms’ net borrowing this year is expected to be around five times higher than the amount borrowed in 2019, with many firms predicted to only start repaying this debt and reducing their borrowing from 2022.
“And our forecast shows that banks will continue to lend next year to support business and growth in the UK economy, with the EY ITEM Club predicting business lending growth of more than five per cent in 2021.”
Ali added that total business loan losses are forecast to rise from 0.3 per cent in 2019 to 0.4 per cent and 0.5 per cent in 2020 and 2021, respectively.
“New lockdown restrictions could see borrowing levels rise even further, and subsequently the potential for loan losses to increase,” he added.
Business lenders have responded to the forecasts by warning that “not all businesses can or will be saved”.
“While the [bounce back loan scheme] has proved to be instrumental in keeping many small- and medium-sized enterprises (SMEs) alive, not all businesses can or will be saved,” said Douglas Grant, director of the Isle of Man’s Conister Bank.
“The [bounce back loan scheme] has, until now, acted as an important triage system to identify and support viable businesses that need credit the most and in doing so, provide a much needed boost to the health of the UK SME segment as a whole.
“The latest lockdown measures in England will sadly be the last nail in the coffin for many companies which simply cannot receive capital quickly enough.”
EY ITEM Club based its predictions on the assumption of an orderly Brexit, and a return to normal or near-normal economic conditions early next year.