Our latest forecast shows the financial services sector will continue to support consumers, businesses and the wider economy - despite on-going volatility - with business lending forecast to increase over 5% in 2021.
Meanwhile, consumer credit is forecast to see the biggest fall in nine years in 2020 – nearly 6% - with only a slow recovery of 0.5% growth in 2021. Whilst it remains to be seen how consumer confidence will evolve, local lockdown restrictions and a forecasted steep rise in unemployment are likely to further negatively impact growth, placing additional pressure on banks.
One area where reasonable growth is forecast is mortgage lending. Despite the economic challenges, mortgage lending growth of 3.2% and 3.4% is forecast this year and next, due to the temporary cut in stamp duty, very low mortgage rates and savings accumulated during lockdown helping to fund property deposits and trading-up. However, new lockdown restrictions – and the potential for more to come – present a risk to our forecast.
The rest of the financial services industry is also feeling the effects of the economic impact from COVID-19. Insurers are facing multiple challenges this year and asset managers are contending with a fall in AUM – 2020 is forecast to see the value of UK asset managers AUM decline by 1.5%, a stark contrast to the growth of 11.6% seen in 2019.
COVID-19, continued Brexit uncertainty and climate change risk are a potent combination of both short-term and long-term challenges for the financial services sector. But if there’s one thing this forecast shows, it is the inter-relation between the macroeconomic forecast and the role of the financial services industry in getting credit to consumers and small businesses, supporting households in their savings – and accessing those savings – and the insurance sector’s support to businesses and consumers in difficult times. Over the next few years the UK needs a healthy financial services sector, so it can remain focused on supporting the economy through short-term volatility and uncertainty, as well as ensuring the country retains its place as a world-leading financial services centre post-Brexit such that it can help build back a better Britain
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Summary
The latest EY ITEM Club Outlook for financial services shows that, despite an economic rebound over Q3 2020, rise in GDP is expected to slow significantly in Q4 2020 as post-lockdown release of pent-up demand fades, and new social distancing measures and local restrictions drag on activity.