Business lending is predicted to hit 2.8% in 2025

13th May 2024

The EY Item Club has forecasted bank-to-business lending will to grow just 0.5% (net) this year, before rising to 2.8% (net) in 2025, as lower borrowing costs boost demand

The analysis says lending to UK businesses will increase by 0.5% this year, having contracted by 2.1% in 2023. Looking ahead, growth in business lending is predicted to hit 2.8% in 2025 and 3.4% in 2026.

Lending to UK businesses contracted in 2023 (-2.1% net), and while growth is forecast this year, sustained high borrowing costs and macroeconomic and geopolitical uncertainty mean it will likely be subdued. The EY ITEM Club forecasts lending to UK businesses to grow just 0.5% (net) this year.

Business sentiment is expected to improve throughout the course of this year as the economic outlook improves and provided the Bank of England cuts interest rates.

As businesses are compelled to increase their level of digitalisation, develop artificial intelligence (AI) technologies and move further towards green energy generation, the EY ITEM Club expects a boost in borrowing to fuel investment. As a result, UK business lending is forecast to grow 2.8% (net) in 2025 and 3.4% (net) in 2026.

Write-off rates on loans to UK businesses averaged 0.17% in 2023 and are forecast to rise to 0.2% each year from 2024 to 2026, driven by higher borrowing costs. However, these impairment levels also remain well below 1%-1.5% seen in the early 2010s, as many firms have chosen to pay down their debt since the global financial crisis.

Anna Anthony UK Financial Services Managing Partner at EY said “The UK’s financial services industry remains robust amid extremely challenging macroeconomic conditions. This year, again, its strong foundations and capital position will ensure it remains resilient and forward-looking. With signs that economic momentum will build in 2025, cautious optimism is rising, and firms can increasingly look to accelerate their growth and innovation agendas. Of course, amid ongoing economic and geopolitical uncertainty, insurers, asset managers and banks will be keeping a careful eye on their costs and balance sheets this year, while also safeguarding customer interests and investing in transformation to ensure the UK’s financial sector retains its competitiveness on the international stage.”