Borrowing by businesses set to fall sharply - EY ITEM Club

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 per cent (£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.

Net lending via credit cards and personal loans is also set to end the year in negative territory, falling 0.7 per cent on top of 2020’s 9.8 per cent decline. This equates to a £1.4bn fall in the stock of consumer credit, as households have made more repayments than in pre-pandemic times and have used savings over loans at a greater rate.

In contrast, the housing market has seen strong activity this year, with mortgage lending forecast to rise 4 per cent in 2021 – the fastest increase since 2007 – boosted by the stamp duty holiday.

However, uncertainty surrounding the new Omicron Covid-19 variant could affect the forecast going forward.

Steve Robb, head of financial services for the North at EY, said: “Economic recovery over the spring and summer was thankfully faster and stronger than many anticipated.

"The housing market remained resilient, boosted by the stamp duty holiday, and consumers and businesses – especially larger corporates – were able to make bigger inroads than expected into paying off debt.

"From an industry perspective, the focus on repayment is a double-edged sword; while the debt burden for many has been reduced, the focus on loan repayment over investment will have a long-term impact on growth, and for the banks facilitating lines of credit, the fall in borrowing activity – combined with the low interest rate environment – will have squeezed margins.

"As we look to 2022, welcome growth is expected across all lending fronts, albeit at fairly modest rates.

“While uncertainty around the new Omicron Covid-19 variant, and how it might affect families and businesses around the world, is certainly not what anyone wanted as we head into Christmas and the New Year, the UK financial system remains resilient and well capitalised, making it well equipped to continue to support consumers and firms.”