Consumer borrowing from UK banks will fall at the fastest rate on record in 2020, amid the recession caused by the coronavirus pandemic, forecasts suggest.
Banks are expected to lend 15.9% less to consumers via personal loans and credit cards, according to forecasts by EY Item Club, the economic forecasting arm of the accounting firm.
A fall at that speed would represent the steepest slowdown in lending to consumers in at least a generation, since records began in 1993.
The coronavirus pandemic and the consequent recession have prompted big changes in bank lending patterns, with consumers cutting back but businesses looking to borrow more to see them through the crisis.
Separate figures from the Bank of England show that consumers repaid £15.6bn of consumer credit between March and June. The £7.4bn repayment in April, the first full month of strict restrictions on business and social life, was the biggest recorded since the data was first collected in 1993.
At the same time, lending by banks to UK businesses has surged, in large part because government-backed loans were a key part of the economic response to the pandemic. EY Item Club’s forecasts suggest business lending will grow by 14.4% this year compared to 2019 – the biggest increase in 13 years. Before the pandemic business lending had on average declined in the prior decade.
While the increase in lending to businesses might cushion some of the blow from the pandemic, the banks have already written off loans worth billions of pounds in anticipation of a slow recovery and rising unemployment. HSBC, NatWest Group (formerly known as Royal Bank of Scotland), Lloyds Banking Group and Barclays put aside a collective £9bn during the second quarter of 2020 to cover bad debts.
The forecasters at EY Item Club expect consumer credit to rebound in 2021, but the total stock of debt is not expected to rise above pre-pandemic levels that peaked at £225bn until at least 2022.
Mortgage lending is forecast to rise by 2.6%, the slowest increase in five years, as rising unemployment dampens the housing market, EY Item Club said.
Omar Ali, EY’s UK financial services managing partner, said: “Covid-19 has caused unprecedented challenges for the UK economy, putting financial strain on both businesses and households, and has resulted in a staggering amount of money being lent to firms over a short period of time.”
Ali added that a weakened economy, increasing write-offs on loans and slow consumer borrowing forecasts will “add pressure to their profitability and ultimately their ability to lend more”.
