Business lending to drop at fastest rate in decades as recession fears intensify

According to the latest forecast from EY Item Club, an economic forecasting group, bank to business lending is expected to contract 3.8 per cent this year – one of the sharpest falls in decades – before returning to growth in 2024. 

Borrowing demand is expected to weaken as firms, both large and small, face multiple pressures from higher costs of servicing debt, lower earnings and continued global supply chain disruption.

“With more than 70 per cent of corporate bank loans on variable rates, UK businesses are likely to be affected in the short term by increases in interest rates,” Dan Cooper, UK Head of Banking and Capital Markets at EY, said.

“SMEs are currently more vulnerable to a rise in loan impairments than larger businesses as they are less able to insulate themselves against higher rates and also because of the volume of bank debt they hold, which has grown since 2019,” he continued. 

UK mortgage lending meanwhile is expected to grow very slowly, at just 0.4 per cent in 2023 – the slowest rate since 2011. This is expected to increase to 1.4 per cent in 2024.

EY noted that this was a result of both supply and demand factors. Banks are expected to tighten their mortgage lending criteria as a result of a challenging outlook and falling house prices while demand will fall on cost of living pressures and higher interest rates.

“A contraction in net business lending and general downturn across the housing market looks inevitable, and an increase in loan defaults seems unavoidable,” Cooper commented. 

Read more at City A.M.