UK business borrowing on course to fall sharply

UK net business borrowing is on course to fall sharply over 2021 as firms pay down existing debt far faster than predicted, according to the latest EY ITEM Club for Financial Services Forecast. The forecast estimates that net bank lending to UK businesses will fall to minus £1.6bn over 2021, following £35.5bn net being lent in 2020, before picking back up again in 2022 with growth of 2.4% (£11bn net). This represents a reversal of the May forecast, when the economic outlook at that time suggested firms would borrow a further £19bn in net terms this year to help them through the pandemic.

The Covid-19 pandemic triggered a surge in corporate borrowing, however, after an initial spike when firms took out loans largely for precautionary measures, many – especially larger corporates – have paid down their liabilities and strengthened their balance sheets.

Overall, the total stock of business debt is set to fall by 0.3% in 2021, a sharp contrast with 2020’s 8% rise. However, Bank of England data shows a marked disparity in the rate at which large companies and SMEs are paying down debt. Larger firms owed £312bn in October 2021 (2.4% less than then £320bn in February 2020, just before the pandemic began). But SME debt rose from £167bn to £210bn (a 26% increase over the same timescale), highlighting that smaller firms have needed greater financial assistance through the pandemic and will likely need additional support through the recovery period.

Looking ahead, headwinds in the shape of a potential rise in borrowing costs due to likely interest rate increases in the new year, and some firms drawing on cash saved during the pandemic to finance investment could weigh on overall demand for business lending. That being said, business lending is forecast to grow 2.4% in 2022 (just over £11bn in net terms) based on more normal economic conditions returning and firms re-focusing on growth over debt repayment.

On the business investment front, low activity so far this year points to a year-on-year fall of just over 1%. However, given the strong current financial position of many firms and recent positive business surveys, if the Omicron variant does not heavily affect the economic environment, the EY ITEM Club expects a strong rebound in 2022, with growth in business investment forecast to run at almost 14% in 2022.