Bank lending to UK businesses and households to return to growth this year, and accelerate over 2025 and 2026

• Total bank lending to grow 2.6% this year (up from - 2.2% in 2023), 3.7% in 2025 and 4.3% in 2026
• Business lending to grow 3.1% this year (up from - 2.1% in 2023), 5.6% in 2025 and 6.2% in 2026, as interest rates and inflation continue to fall
• Mortgage lending to grow 1.6% this year (up from - 0.1% in 2023), 2.6% in 2025 and 3.3% in 2026, as housing affordability improves

Total bank lending to UK businesses and households is forecast to return to growth this year, following a -2.2% (net) contraction in 2023, according to the latest EY ITEM Club Outlook for Financial Services. Provided inflation and interest rates continue to gradually fall following August and November’s Bank of England rate cuts – and despite the immediate market response to the Autumn Budget – borrowing appetite is expected to increase as the cost of capital lowers. As a result, the EY ITEM Club forecasts total bank loans to UK households and businesses to grow 2.6% (net) this year, 3.7% (net) in 2025 and 4.3% (net) in 2026.

The UK economy is set for steady growth over the next two years, with GDP forecast to rise 0.9% in 2024, 1.5% in 2025 and 1.6% in 2026. This economic recovery is expected to feed through to the banking sector as interest rates fall and appetite to borrow strengthens over time.

Anna Anthony, UK Financial Services Managing Partner at EY, comments: “The UK’s macroeconomic environment has been extremely challenging in recent years, but it appears we are now turning a corner. Although we are yet to see the full economic response to the Autumn Budget and the US election, deepening signs of economic recovery are giving firms and households increasing reason for optimism. Falling inflation and interest rate cuts should boost borrowing appetite over time, and the outlook for bank lending in the UK is more positive than it has been in a number of years. 

“While this outlook is promising, optimism should remain measured. If recent history has taught us anything, it is that economic shocks can come at any time. The UK financial services industry must continue to shore up its capital strength while investing in key strategic areas to ensure it capitalises on growth opportunities and maintains its position on the international stage.”

UK business lending set for three years of accelerating growth

Lower borrowing costs as a result of falling inflation and interest rates are boosting the borrowing appetite of UK businesses, and the EY ITEM Club forecasts UK bank-to-business lending to return to growth this year (3.1% net, up from -2.1% net). This growth is expected to be driven by large businesses, with loans to corporates increasing 1.5% (net) year-on-year in the twelve months to September 2024, according to the Bank of England. In contrast, loans to SMEs have fallen by -3.7% (net) year-on-year, as smaller firms continue to focus on repaying loans taken through COVID-19 support schemes.  

Looking ahead, business borrowing appetite is set to strengthen further as political uncertainty eases following the UK general election, provided interest rates continue to gradually fall and as deal-making picks up as expected. As a result, the EY ITEM Club forecasts bank-to-business lending to rise to 5.6% (net) in 2025 and 6.2% (net) in 2026 – the highest growth since 2020 when the Government announced loan support during COVID-19.

UK mortgage demand to be boosted by interest rate cuts

Borrowing appetite of UK households is beginning to pick up following August and November’s interest rate cuts and as housing affordability improves. As a result, the EY ITEM Club forecasts growth of 1.6% (net) in UK mortgage lending in 2024 – a return to growth following the -0.1% contraction in 2023. Providing interest rates continue to be gradually cut as predicted, the EY ITEM Club forecasts UK mortgage lending to grow further to 2.6% (net) in 2025 and 3.3% (net) in 2026. 

Consumer credit demand to remain strong but ease back in 2025 and 2026

UK unsecured credit lending is expected to grow 8.6% (net) in 2024 – rising from 6.1% in 2023 – driven by stabilising inflation and steady wage growth. These conditions are expected to largely persist over the next two years, and the EY ITEM Club forecasts unsecured lending to remain strong but ease back to 6.5% (net) in 2025 and 2026.

Default rates set to stabilise as borrowing costs fall

Write-off rates on loans to UK businesses are expected to remain low at 0.17% in 2024, 2025 and 2026, as borrowing costs lower and corporate balance sheets stabilise. 

Write-off rates on UK mortgages are forecast to rise slightly to 0.004% in 2024 (from 0.002% in 2023), before easing back to 0.002% in 2025 and 0.003% in 2026, driven by low unemployment and household income growth.

Defaults on UK consumer loans are also expected to remain low, due to high employment and the savings built up during the pandemic strengthening the health of household finances. The 2024 rate is forecast to remain unchanged at 0.9%, before rising marginally to 1.0% in 2025 and in 2026. 

Dan Cooper, UK Head of Banking and Capital Markets at EY, comments: “Accelerating growth in lending is welcome news to UK banks, which have recently reported better-than-expected third quarter results. The expectation that loan defaults will stabilise is also positive, and will provide a further boost to banks’ balance sheets. 

“The positive sentiment around economic recovery and a resultant forecast rise in lending means firms can take the opportunity to strengthen their capital reserves and re-focus on longer-term strategic transformation initiatives.” 

Non-life insurance premium income growth to slow to ‘normal’ rates

Non-life insurance premium income is set to grow 7.9% in 2024 – a small decline from 8.8% in 2023 – with demand for policies supported by falling interest rates, improved consumer confidence and steady income growth. These conditions are expected to support demand for the next two years, and with supply chain and cost pressures easing, the EY ITEM Club expects non-life premium income to fall to more ‘normal’ growth rates of 5% in 2025 and 4.5% in 2026. 

Life insurance premium income growth to slow over the next two years

While continued economic recovery will support demand for UK life-insurance products and the increase in workplace pension take-up remains stable, gradually slowing growth in households’ disposable income is expected over the next three years. As a result, the EY ITEM Club expects life insurance premium growth to fall to 6.2% in 2024 (from 6.9% in 2023), 4% in 2025 and 2.9% in 2026.

UK AUM growth set to rise this year as interest rates fall

Following a strong performance in risk assets, with equity and bond prices rising sharply throughout the year due to anticipated interest rate cuts, UK assets under management (AUM) are forecast to grow 5.4% in 2024 – up from 3.4% in 2023. Looking ahead, with interest rate cuts largely already reflected in UK asset prices, the EY ITEM Club expects UK AUM to slow to 5% in 2025, however, the market response to the US election could alter this forecast.

Anna Anthony concludes: “The UK’s financial services sector has remained resilient amid challenging macroeconomic conditions in recent years. While the light at the end of the tunnel appears to be drawing closer, ongoing geopolitical tensions in particular present downside risks to the forecast. As ever, UK banks, insurers and asset managers must continue to support customers, keep a careful eye on evolving geopolitical events, and make strategic investments for the future.”

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.  

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