The outlook for Britain’s key financial services sector has “darkened considerably” as a result of the Brexit vote triggering a slowing economy and market uncertainty, an influential new survey out today claims.
The EY Item Club warns that it believes lending to business will fall nearly 2 per cent in 2017 and a further 1 per cent in 2018 amid widespread downgraded economic forecasts following the European Union referendum.
From this year, it says mortgage lending will expand less than 1 per cent on average per year over the next three years compared with 3 per cent in 2014 and 2015.
The pessimism for the financial services sector, which accounts for about 10 per cent of the country’s GDP, comes as the City regards it as a near-certainty that the Bank of England will cut interest rates to just 0.25 per cent this Thursday, in an effort to prop up the economy.
However, the EY Item Club survey still forecasts both consumer confidence and business investment will be hit “in the short to medium term”. It also believes retailers will see a fall in purchase of so-called “big ticket items”.
The report says: “Although banks have committed to lend, the forecast for slower economic growth means that demand for credit will weaken, with business and consumers less eager to take on debt.
“Mortgage lending and consumer credit will grow, but at a slower pace than previously hoped. Business lending is predicted to shrink by 1.8 per cent next year, with the recovery in lending now revised back to 2019.
“Banks will also face a squeeze on net interest margins and depressed profits from lending due to prolonged lower interest rates.”
Consensus predictions for UK economic growth, which helps supports bank profits, have been revised downwards from 2.6 per cent to 1.9 per cent for 2016 and from 2.3 per cent to just 0.4 per cent in 2017.
Sue Dawe, head of EY’s financial services practice in Scotland, said: “We had hoped 2016 would be the year that total lending recovered to pre-crisis levels, but with the revised economic outlook this looks increasingly unlikely.
“Whilst banks are still willing to lend, there is a strong sense of ‘wait and see’ from business and consumers as they await details of what Brexit will look like in reality.”
EY Item Club also predicts a bumpy road ahead for investors. It says: “For asset managers, the prospect of interest rate rises and investors regaining their appetite for risk has been replaced with a likely prolonged period of low interest rates, volatility in financial markets, and more sluggish growth in household wealth following the Brexit vote.”
The forecaster says that assets under management will likely rise by only 1.5 per cent per year from 2016-19, compared to 7.7 per cent in 2015, due to the increased investor uncertainty and a deteriorating economic outlook.