The prospect of a ‘softer Brexit’ will not be sufficient to stave off a slowdown in business and mortgage lending in 2018 as higher inflation takes its toll on the UK economy, the latest outlook from EY ITEM club has asserted.
The Big Four accounting firm predicts the stock of mortgage lending will reduce from £1.192bn in 2017 to £1.184bn by 2018.
Lending to corporates is also forecast to fall marginally next year to £424bn from £425bn this year, before gradually climbing back to £435bn at the turn of the next decade.
“Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country,” said Omar Ali, EY’s UK financial services managing partner.
While lending conditions in these areas is expected to improve later in the decade, “this does depend on the right deal being struck with Europe,” Ali added.
The only type of lending unlikely to be hit next year is consumer credit on the basis that households will borrow more to offset the fall in real incomes.
UK insurers are also in for a bumpy ride as the decade draws to a close, plagued by policy headwinds, like the recent rise in insurance premium tax from 9% to 12%, and a “challenging macroeconomic climate”.
Life and pensions businesses are expected to enjoy more stability, EY ITEM club noted, with the caveat that life gross premiums are predicted to rise 4% per year on average, compared to the 5.5% averaged in the five years to 2016.
The data from the EY report also suggests that weak sterling and the strong growth in equity markets should provide a more supportive environment for parts of the investment industry.
After reaching a six-year high of £1.1trn, AUM is expected to continue to rise “modestly” over the next few years, hitting £1.3tn by 2020.
Leading the charge in AUM growth is equities, which are forecast to rise by a little under 6% per year from 2017 to 2020.
Bonds’ share in UK AUM, on the other hand, is expected to see a modest decline from 15.2% in 2016 to 13.8% in 2020, driven by further Federal Reserve rate hikes this year and a tapering of the European Central Bank’s asset purchase programme.
