Bank lending to businesses forecast to grow by 1% this year

20th February 2024

EY Item Club is predicting that bank lending is expected to remain subdued this year, with elevated interest rates tamping appetite for borrowing.

The report says that bank lending to businesses will rise by only 0.8% amid weak demand for credit and restrictive borrowing costs. EY says that although the Bank of England is expected to lower its base interest rate three times, it will still end the year at a higher level compared to the past decade.
UK firms are apprehensive about taking on debt in an uncertain economic environment, leading to restrained business investment.

Total UK bank loans forecast to grow by 2.2% net this year, improving on 2023’s weak 0.6% net increase. Bank-to-business lending forecast to grow just 0.8% net in 2024 – following a -2.1% contraction in 2023 – before rising 3.5% net in 2025

Whilst there is an improvement on last year’s business lending contraction, UK firms appear apprehensive about taking on debt in a still-uncertain economic environment at home and abroad, especially while borrowing costs remain high. However, a rebound to 3.5% (net) growth is forecast for 2025 as further falls in inflation and interest rates are expected to boost business appetite and confidence.

Total bank loans to households and businesses – including mortgages and consumer credit – are expected to grow 2.2% (net) this year, up from 0.6% (net) in 2023, and rise to 3.5% (net) in 2025 and 3.4% (net) in 2026. Despite entering into a technical recession in 2023, falling inflation and energy prices, alongside expected interest rate cuts, mean UK GDP is expected to rise 0.9% year, with further growth of 1.8% in 2025 and 2% in 2026 predicted. These green shoots of economic recovery are driving the forecast increase in both consumer and business borrowing this year and the next couple of years.

Anna Anthony, UK Financial Services Managing Partner at EY, said “This will be another tough year for UK businesses and households, however, there are signs to suggest that momentum in the economy will build following a weak 2023. If borrowing costs and interest rates fall as expected, by next year we expect market confidence to have lifted markedly. There are of course headwinds challenging growth, and with geopolitical tensions rising and a major general election coming up in the UK, potential risks to the downside remain very real.

“Business investment and borrowing appetite is expected to be restrained for much of 2024 as firms continue to take a cautious approach to managing their balance sheets. However, as the economy improves, firms’ confidence to invest and grow should rise, and bank lending to UK businesses is expected to lift substantially from 2025.”