Forecast revised upwards as economic recovery accelerates
Net mortgage lending is expected to grow by 1.2% this year, up from the EY ITEM Club’s February forecast of 0.4% as housing market activity picks up.
However, mortgage lending growth is still below the 3% average of the pre-pandemic years of 2015-19 in large part due to rising interest rates, reflecting a housing market which is likely to underperform the wider economy.
The EY ITEM Club UK Bank Lending Forecast also projected that total loans to households and businesses would rise 1.2% this year for a net increase of £29 billion, improving on February’s forecast which predicted a 0.1% fall, or a net decline of £2 billion.
The economic forecasting group noted that the UK economy has performed better than expected so far this year, and should avoid recession as it did last year, allowing the group to upgrade its 2023 UK bank lending forecast for households and businesses.
Falling inflation, lower-than-expected energy bills, and a resilient jobs market mean UK GDP is expected to grow 0.2% in 2023, rather than contracting as previously forecast, which should drive an increase in consumer and business borrowing.
Mortgage approvals fell significantly in late 2022 and early 2023, falling in January this year to 39,886. This was the lowest level in 14 years, excluding the pandemic period, which reflected an increase in mortgage rates, pressure on household incomes from high inflation and a weak macroeconomic outlook.
However, housing market activity has picked up in the past few months, boosted by an improvement in consumer sentiment, and recent data does not signal significant tightening to lending criteria. The latest Bank of England data reported mortgage approvals climbed to 52,011 in March 2023.
With inflation expected to continue falling back throughout 2023, and with real incomes improving, the EY ITEM Club said mortgage lending would rise 1.2% this year – a £20 billion increase in net terms – and 1.8% in 2024 for a £30 billion net increase. Further growth of 2.7% is also forecast in 2025 for £46 billion net.
Unsecured lending is now expected to rise 6.5% in 2023, up from 4.8% in the February Forecast, and while business lending is still forecast to contract this year at -0.8% net, it improves on the previous forecast of a -3.8% contraction as financial pressures from high inflation and supply frictions ease.
“We’re still on the path to economic recovery and many businesses and consumers – particularly the most vulnerable in society – continue to face significant cost-of-living pressures,” Anna Anthony (pictured left), UK financial services managing partner at EY ITEM Club, commented. “This cannot be underestimated, and appropriate support must still be provided, but we are in a more optimistic place than we were a few months ago.
“The recession that many thought was inevitable is now likely to be avoided and energy prices have fallen, boosting consumer and business sentiment. Despite recent volatility in the global banking sector, the EY ITEM Club has been able to upgrade its growth forecasts for UK bank lending this year, which is positive news.”
Dan Cooper (pictured right), UK head of banking and capital markets at EY ITEM Club, added that while the current market environment is far from easy for consumers, businesses and banks, economic conditions have improved from just a few months back.
“UK banks are in a strong capital position, bolstered by the expected rise in total loan growth, and will be able to absorb a higher level of losses,” Cooper said. “Banks will still need to continue to manage their balance sheets carefully, but they are well placed to deal with whatever challenges lie ahead.”
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