Bank lending to UK businesses forecast for <1% growth this year

• Total UK bank loans forecast to grow by 2.2% net this year, improving on 2023’s weak 0.6% net increase

• Bank-to-business lending forecast to grow just 0.8% net in 2024 – following a -2.1% contraction in 2023 – before rising 3.5% net in 2025 

• Mortgage lending forecast to grow 2.2% net in 2024 and 3.4% net in 2025, as rates fall and the economic outlook improves

• Unsecured lending forecast to grow 5.2% net in 2024 before slowing to 4.2% net in 2025, as lower inflation weighs on cash spending and associated lending 

UK bank-to-business lending is set to remain low this year, with growth of just 0.8% (net) forecast in 2024, according to the latest EY ITEM Club UK Bank Lending Forecast. While an improvement on last year’s business lending contraction, UK firms appear apprehensive about taking on debt in a still-uncertain economic environment at home and abroad, especially while borrowing costs remain high. However, a rebound to 3.5% (net) growth is forecast for 2025 as further falls in inflation and interest rates are expected to boost business appetite and confidence.

Total bank loans to households and businesses – including mortgages and consumer credit – are expected to grow 2.2% (net) this year, up from 0.6% (net) in 2023, and rise to 3.5% (net) in 2025 and 3.4% (net) in 2026. Despite entering into a technical recession in 2023, falling inflation and energy prices, alongside expected interest rate cuts, mean UK GDP is expected to rise 0.9% year, with further growth of 1.8% in 2025 and 2% in 2026 predicted. These green shoots of economic recovery are driving the forecast increase in both consumer and business borrowing this year and the next couple of years. 

Anna Anthony, UK Financial Services Managing Partner at EY, comments: “This will be another tough year for UK businesses and households, however, there are signs to suggest that momentum in the economy will build following a weak 2023. If borrowing costs and interest rates fall as expected, by next year we expect market confidence to have lifted markedly. There are of course headwinds challenging growth, and with geopolitical tensions rising and a major general election coming up in the UK, potential risks to the downside remain very real.” 

UK business lending to remain weak in 2024 after a sharp contraction in 2023, but rebound in 2025 and 2026

Lending to UK businesses fell a sharp -2.1% (net) in 2023. While some economic drivers are set to improve this year, high borrowing costs and market apprehension about the macroeconomic and geopolitical environment mean the EY ITEM Club predicts growth will remain low at just 0.8% (net) in 2024.

Business sentiment is expected to improve, provided inflation continues to fall and the Bank of England cuts interest rates as predicted. Growth in digitalisation, adoption of artificial intelligence (AI) technologies and the move towards green energy generation should also help to boost borrowing. Overall, growth of 3.5% (net) is forecast in 2025 – the highest growth since 2020 when the Government announced loan support during COVID-19. Growth is then forecast to rise 3.2% (net) in 2026 as GDP growth and interest rates stabilise.

Anna Anthony continues: “Business investment and borrowing appetite is expected to be restrained for much of 2024 as firms continue to take a cautious approach to managing their balance sheets. However, as the economy improves, firms’ confidence to invest and grow should rise, and bank lending to UK businesses is expected to lift substantially from 2025.” 

Mortgage lending demand set to rise in 2024 and 2025, as rates fall

Despite UK mortgage lending growth falling -0.1% (net) in 2023, demand for housing loans is expected to rebound this year, buoyed by the prospect of falling interest rates. The EY ITEM Club predicts that the Bank of England will cut its policy rate from 5.25% to 4% by the end of 2024, and alongside falling inflation, the cost of home loans will also likely decrease. 

As a result, EY ITEM Club forecasts mortgage lending to grow 2.2% (net) this year, 3.4% (net) in 2025 and 3.3% (net) in 2026.

Consumer credit demand set to slow this year and next, as inflation continues to fall

UK unsecured credit grew 6.1% (net) in 2023, up from 4.2% (net) in 2022 – the fastest increase since 2017 – largely driven by inflation driving up the cost of goods and the cost-of-living crisis. 

If inflation continues to fall in 2024, the demand for unsecured lending will likely slow in tandem, and EY ITEM Club expects growth in consumer credit to fall to 5.2% in 2024, and further to 4.2% in 2025, before rising slightly to 4.5% in 2026.

Default rates are set to rise, but from low levels

EY ITEM Club forecasts write-off rates on business loans to average 0.22% in 2024 due to the steep rise in borrowing costs. While this is an increase on 0.14% in 2023, these levels remain well below 1%-1.5% seen in the early 2010s. Impairments are expected to fall back to 0.18% in 2025 and 0.15% in 2026 if borrowing rates fall as predicted.

Rising unemployment and an increase in the number of mortgage holders coming off fixed priced products onto higher-priced deals have triggered a small rise in impairments. The EY ITEM Club forecasts with write-off rates to average 0.013% this year (up from 0.004% in 2023), 0.016% in 2025, and 0.013% in 2026. However, these rates are well below the peak of 0.08% post-financial crisis in 2009. 

Write-off rates on consumer loans are forecast to rise to 1.5% this year – a slight increase on the 1% averaged in 2023 – as ‘higher for longer’ borrowing rates impact people’s ability to repay. It is expected that this falls back slightly to 1.4% in 2025 and 2026 – considerably lower than the peak of 5% in 2010 – as interest and borrowing rates fall.  

Dan Cooper, UK Head of Banking and Capital Markets at EY, comments: “There is no doubt that the economic environment has been extremely difficult for both businesses and households of late. While inflationary pressures are beginning to ease, borrowing costs remain high. Banks must continue to keep a close eye on how customers – particularly those most vulnerable – are managing, and on rising impairments, not least as fixed-rate mortgages roll onto higher rates this year.

“The banking sector continues to balance low levels of lending growth with the need to invest in strategic priorities and transformation objectives. While the economic climate is expected to improve this year, it will take some time to filter through the system and make a material difference to consumer and business sentiment. Despite this, banks must ensure that time, money and resource continue to flow into keys areas to remain competitive, such as AI innovation and sustainability.”

Notes to editors

About EY ITEM Club 

• The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury’s model of the UK economy. Its forecasts are independent of any political, economic or business bias and this independence is underpinned by the untied sponsorship of Ernst & Young LLP.  
• ITEM stands for Independent Treasury Economic Model. HM Treasury uses the UK Treasury model for its UK policy analysis and Industry Act forecasts for the Budget. ITEM’s use of the model enables it to explore the implications and unpublished assumptions behind Government forecasts and policy measures.  Uniquely, ITEM can test whether Government claims are consistent and can assess which forecasts are credible and which are not.
• EY Economics for Business provides knowledge, analysis and insight: helping businesses understand the economic environments in which they operate, both in the UK and globally. Find out more