Lending to businesses is set to grow this year for the first time since the financial crisis, an influential think-tank said today.
The EY Item Club forecast said that lending to firms peaked at £575 billion in 2008, before the crash struck, and has dropped every year since then.
Today’s report said growth for 2015 would be “marginal”, at just 0.25 per cent compared with last year, but the figure is expected to continue rising over the next four years as the economy recovers at a steady pace and by 2019 will be up to 25 per cent higher than 2014 levels.
EY’s prediction comes in the wake of data released by the Bank of England last week that showed lending to non-financial firms plunged by £5.5bn in June, marking the sharpest fall since records began in May 2011. The contraction followed an increase of £818 million in May.
Omar Ali, UK head of banking and capital markets, said: “Consumer credit finally turned the corner in 2014, and now business lending will hopefully follow suit. The rising demand from businesses for new loans is good news for the banks, but the June drop in net lending shows how vulnerable they are to bigger businesses, with access to alternative sources of finance such as bonds, paying off overdrafts in preparation for rising interest rates.”
However, he added: “At this rate the rise in overall business lending this year will only be marginal. Add further fines on the horizon, the introduction of a banking tax surcharge, ongoing regulatory reform and the pressure to create more competition to the mix, and you can see why banks won’t be pausing to celebrate yet.”
Lending in the second half of this year needs to be just 3 per cent higher than in the same period a year ago for business lending figures to grow overall this year, according to the EY Item Club forecast for financial services. Gross lending for the first half of this year is up 19 per cent to £103.4bn on a year ago and is expected to pick up further, the report said.
The study came as the CBI said Smaller firms have reported steady growth in recent months, although exports are “dragging down” performance amid the continued strength of the pound. Its survey of more than 400 small and medium-sized companies showed business optimism improved in the last three months, although export orders and prices fell, with the trend expected to continue.
Anna Leach, head of economic analysis at the employers’ organisation, said: “Optimism among smaller manufacturers improved this quarter, alongside steady employment growth, rising output and new domestic orders.
“The relative strength of the pound against the euro is hitting export orders and margins. This, alongside uncertainty regarding Greece, threatens growth prospects in the eurozone.”
The CBI’s research found that 32 per cent of small and medium-sized manufacturing firms were more optimistic during the three months to July, while 18 per cent had become less confident about the outlook, giving a positive balance of 14 per cent, up from just 4 per cent in the previous quarter.
However, companies’ optimism about their prospects for overseas sales in the year ahead remained negative for the second quarter running, with export prices falling at the fastest pace since October 2003. Price remains the main factor likely to limit export orders, cited by 49 per cent of firms, the study found.