UK bank-to-business lending is set to remain low this year, with growth of just 0.8% (net) forecast in 2024, according to the latest EY ITEM Club UK Bank Lending Forecast. While an improvement on last year’s business lending contraction, UK firms appear apprehensive about taking on debt in a still-uncertain economic environment at home and abroad, especially while borrowing costs remain high. However, a rebound to 3.5% (net) growth is forecast for 2025 as further falls in inflation and interest rates are expected to boost business appetite and confidence.

Total bank loans to households and businesses – including mortgages and consumer credit – are expected to grow 2.2% (net) this year, up from 0.6% (net) in 2023, and rise to 3.5% (net) in 2025 and 3.4% (net) in 2026. Despite entering into a technical recession in 2023, falling inflation and energy prices, alongside expected interest rate cuts, mean UK GDP is expected to rise 0.9% year, with further growth of 1.8% in 2025 and 2% in 2026 predicted. These green shoots of economic recovery are driving the forecast increase in both consumer and business borrowing this year and the next couple of years. 

Commenting on this, EY UK financial services managing partner, Anna Anthony, said: “This will be another tough year for UK businesses and households, however, there are signs to suggest that momentum in the economy will build following a weak 2023.

“If borrowing costs and interest rates fall as expected, by next year we expect market confidence to have lifted markedly. There are of course headwinds challenging growth, and with geopolitical tensions rising and a major general election coming up in the UK, potential risks to the downside remain very real.” 

UK business lending to remain weak in 2024 after a sharp contraction in 2023, but rebound in 2025 and 2026

Lending to UK businesses fell a sharp -2.1% (net) in 2023. While some economic drivers are set to improve this year, high borrowing costs and market apprehension about the macroeconomic and geopolitical environment mean the EY ITEM Club predicts growth will remain low at just 0.8% (net) in 2024.

Business sentiment is expected to improve, provided inflation continues to fall and the Bank of England cuts interest rates as predicted. Growth in digitalisation, adoption of artificial intelligence (AI) technologies and the move towards green energy generation should also help to boost borrowing. Overall, growth of 3.5% (net) is forecast in 2025 – the highest growth since 2020 when the Government announced loan support during COVID-19. Growth is then forecast to rise 3.2% (net) in 2026 as GDP growth and interest rates stabilise.

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Anna Anthony continues: “Business investment and borrowing appetite is expected to be restrained for much of 2024 as firms continue to take a cautious approach to managing their balance sheets. However, as the economy improves, firms’ confidence to invest and grow should rise, and bank lending to UK businesses is expected to lift substantially from 2025.” 

Mortgage lending demand set to rise in 2024 and 2025, as rates fall

Despite UK mortgage lending growth falling -0.1% (net) in 2023, demand for housing loans is expected to rebound this year, buoyed by the prospect of falling interest rates. The EY ITEM Club predicts that the Bank of England will cut its policy rate from 5.25% to 4% by the end of 2024, and alongside falling inflation, the cost of home loans will also likely decrease. 

As a result, EY ITEM Club forecasts mortgage lending to grow 2.2% (net) this year, 3.4% (net) in 2025 and 3.3% (net) in 2026.

Consumer credit demand set to slow this year and next, as inflation continues to fall

UK unsecured credit grew 6.1% (net) in 2023, up from 4.2% (net) in 2022 – the fastest increase since 2017 – largely driven by inflation driving up the cost of goods and the cost-of-living crisis. 

If inflation continues to fall in 2024, the demand for unsecured lending will likely slow in tandem, and EY ITEM Club expects growth in consumer credit to fall to 5.2% in 2024, and further to 4.2% in 2025, before rising slightly to 4.5% in 2026.