Business loans predicted to fall 3.5% in 2023

Business loans are set to fall by 3.5% in 2023 due to a deteriorating economic outlook according to new research by EY ITEM Club.

The research found that the figures where a contrast to 2021, when many UK businesses focused on paying back pandemic debt, whilst this year has seen a return to growth in borrowing, particularly by large corporates. However the average growth of 2.4% in the eight months to August was low by pre-pandemic standards, where annual growth averaged 5.2% over 2018 and 2019.

A deterioration in the economic outlook, rising interest rates, inflation in the price of capital goods like machinery and the end of the ‘super deduction’ tax incentive next April are all expected to subdue business lending in the second half of the year, with 2.2% (£2bn) net lending growth forecast for 2022. A weakening economy and higher borrowing costs mean net lending is forecast to fall 3.5% (£-6bn) in 2023.This would be the first decline in six years, but less severe than the average annual fall of 7.2% between 2009 and 2012 during and after the financial crisis.

The forecast beyond next year is for a sluggish recovery in lending, with 0.8% growth expected in 2024. This reflects continued constrained appetite among firms to invest as sentiment is damaged by the series of shocks which have affected the economy over recent weeks and years.

Recession and higher borrowing costs are likely to push up impairments on all forms of lending. However, the EY ITEM Club does not expected levels to exceed the peaks recorded in the financial crisis, as tighter regulation and savings will help cushion the impact for consumers, while for businesses who took on debt during the pandemic, low interest, fixed rate government-guaranteed loan schemes will help keep repayments manageable.

Impairments on mortgage loans are forecast to rise from 0.02% in 2022 to a nine-year high of 0.05% next year. This remains below the peak of 0.08% reached in 2009. In 2024 it is forecast to fall to 0.04%.

Write-off rates on personal loans and credit cards are predicted to be 1.9% this year, rising to 2.5% next – the highest level since 2012, albeit half the 5% peak reached in 2010. In 2024 write-offs are forecast to fall to 2.2%.

Meanwhile, impairments on business loans are forecast to reach 0.7% in 2023, approaching double the previous year’s 0.4%. But again, this would still be a long way short of rates of 1%-1.5% in the early 2010s. In 2024 impairments are forecast to drop back to 0.4%.

Dan Cooper, UK Head of Banking and Capital Markets at EY, said “High inflation and falling real incomes mean it is a worrying time for many UK households and businesses just recovering from the pandemic. UK banks are committed to helping consumers and businesses through this difficult period and are in a strong capital position to do so.”

“After years of very low interest rates a rising rate environment will help bank profitability, but there are a number of headwinds the sector is contending with. Low and falling rates of lending growth will clearly affect profit levels, and although not expected to reach post-financial crisis levels, defaults are likely to be significant which means banks will have to manage their balance sheets carefully.”