UK companies are expected to borrow a net £19 billion this year, far less than the £26 billionn initially forecast by experts in February as the economy rebounds quicker than anticipated and the demand for loans to support cashflow reduces, according to the latest EY ITEM Club Interim Bank Lending Forecast.

UK GDP is now expected to grow 6.8% in 2021 – up from the previous forecast of 5% – and consumer credit is forecast to bounce back from the near 10% fall in 2020 and grow 10% by the end of this year as consumer spending increases post-lockdown.

Banks lent businesses £35.5bn in net terms (including COVID-19-related government-backed loans) last year – an 8% year-on-year increase – primarily to help firms through the pandemic. With the economy re-opening, growth in lending volumes is set to halve by the end of this year (to 4%) and slow further in 2022 to 1.6% as businesses increasingly focus on repairing their balance sheets. These forecast figures are modelled on the Government’s roadmap for easing pandemic-related restrictions.

Net lending via credit cards and personal loans turned negative in 2020, falling by almost 10% – the first decline since 2012 – as many consumers reduced their spending and made more repayments than normal during the 2020 lockdowns. But demand for consumer credit is expected to turn positive and return to almost pre-pandemic levels by the end of this year (rising by 10.5%), fuelled by an expected rebound in consumer spending as COVID-19 restrictions are removed. Conversely, while mortgage lending activity remained relatively robust through the pandemic – growing 3% last year, with the same level of growth forecast this year – it is expected to slow down in 2022 as the end of the stamp duty holiday, higher unemployment and stretched affordability weigh on demand.

Anna Anthony, UK Financial Services Managing Partner at EY, said “Given how difficult the last 15 months have been for millions of families and businesses up and down the country, it’s encouraging that the economic recovery will be quicker and stronger than initially forecast, boosting the fortunes of businesses and sparking a rise in consumer spending. That’s not to say though that there won’t continue to be challenges ahead.”

“For the banking sector, the lockdowns have had a unique and divergent impact on lending volumes. While many businesses borrowed more than normal just to survive and millions of consumers repaid record levels of personal debt and borrowed less, these patterns will likely be relatively short-lived. The housing market remained resilient through the disruption, but a slowdown in activity is expected later this year and into 2022.”

“The banks will continue to support businesses and households through the pandemic and beyond, but modest lending growth on some fronts combined with the ongoing very low interest rate environment means the pressures on profitability will remain front of mind for the sector for the foreseeable future.”

Business lending increased rapidly last year due to the COVID-19 lockdowns, with many UK firms relying on government-backed lending schemes to stay afloat. Firms borrowed just over £35bn in net terms in 2020 – four times more than the year before – with borrowing by small and medium-sized enterprises (SMEs) particularly notable (reaching levels 33-times higher than in 2019, according to the Bank of England).

This year, banks are expected to lend  the corporate sector a further £19.2bn in net terms – still high historically but down from the £26bn initially forecast by the EY ITEM Club in February, with companies’ need to borrow to support cashflow reducing alongside a quicker-than-expected economic recovery. Bank to business lending is expected to slow further next year with firms borrowing a net £7.8bn (1.6% y/y growth) as their focus shifts to repairing their balance sheets.

On the business investment front, following a contraction of 10.2% in 2020, the EY ITEM Club expects business investment to gain momentum over the course of 2021, rising 7.1% as companies grow more confident in the recovery. Savings totalling c£150bn accumulated by businesses over the past year (from March 2020 to March 2021) could help fund future investment in many cases. Business investment growth of 10.5% is then expected in 2022 as confidence benefits from a more settled business environment.