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UK rebound shaves billions off corporate borrowing bill

·4-min read
Shoppers return to Oxford Street as non-essential shops reopen and the national coronavirus lockdown three eases on 12th April 2021 in London, United Kingdom. Now that the roadmap for coming out of the national lockdown has been laid out, this is the first phase of the easing of restrictions, and large numbers of people are out in London's retail district laden with shopping bags. (photo by Mike Kemp/In Pictures via Getty Images)
EY expects consumer credit to grow 10.5% this year and 9.1% in the year after as consumer spending rebounds post-lockdown. Photo: Mike Kemp/In Pictures via Getty Images

As optimism in Britain's economic rebound grows, companies in the country are expecting to borrow billions less than previously anticipated, according to a new study.

UK firms now expect to borrow £19bn ($26.4bn) this year — £7bn less than previously forecast in February.

This is due to a combination of several things including an economic boost from the reopening of non-essential retail, outdoor activities and restaurants as well as easing restrictions further down the line.

EY's latest ITEM Club Interim Bank Lending Forecast predicts the demand for loans to support cashflow will reduce, as the economy rebounds quicker than anticipated.

In 2020, banks lent businesses £35.5bn in net terms, including COVID-19-related government-backed loans to help them through the crisis. This was a 8% year-on-year increase.

With the economy re-opening, growth in lending volumes is set to halve by the end of 2021 to 4%, and slow further in 2022 to 1.6%, EY said.

It also expects consumer credit to grow 10.5% this year and 9.1% in the year after as consumer spending rebounds post-lockdown.

In February, annual growth fell to -10% — the lowest level since records began in 1993 — because of low demand for credit and high levels of repayments. It recovered slightly to -8.6% in March.

Britons repaid a total of £23bn of credit card debt and personal loans, between March 2020 to March 2021, EY said. This was "the biggest repayment over an equivalent period on record."

With write-off rates on consumer and business lending dropping in 2020 due to the government's COVID support, it also expects banks to face losses in the coming months as some consumers and businesses may struggle with loan repayments.

But, EY predicts the increase will be relatively small this year and far lower than experienced after the financial crisis in 2008.

Write-off rates on consumer credit are forecast to rise from 1.2% in 2020 to 1.5% this year and 1.8% in 2022. In comparison, 2019’s rate was 1.46%. It expects business loan losses to increase from 0.23% in 2021 to 0.36% next year, compared to 0.33% in 2019.

For context, loan losses peaked at 5.0% for consumer credit in 2010 and 1.6% for business loans in 2011, after the financial crisis.

Read more: UK private sector set for summer rebound as economy reopens

The Big Four firm expects Britain's economy to grow at its fastest rate since the Second World War this year thanks to a stronger start than expected. It also looks set to outpace growth in the US.

UK GDP is forecast to grow by 6.8% in 2021, a significant upgrade on the 5% growth rate EY estimated in January. This would mark the fastest annual growth in national income since 1941.

The UK economy shrank by 9.8% last year. Although this was against the 9.9% initially estimated, it was still the worst performance in the G7 nations and the worst annual performance for over 300 years.

It comes as businesses have adapted better to COVID restrictions and consumer spending has boomed as lockdown measures begin to relax.

Rapid progress with Britain's vaccine rollout programme has also meant a quicker return to normality.

Anna Anthony, UK Financial Services Managing Partner at EY, said: "For the banking sector, the lockdowns have had a unique and divergent impact on lending volumes. While many businesses borrowed more than normal just to survive and millions of consumers repaid record levels of personal debt and borrowed less, these patterns will likely be relatively short-lived.

"The banks will continue to support businesses and households through the pandemic and beyond, but modest lending growth on some fronts combined with the ongoing very low interest rate environment means the pressures on profitability will remain front of mind for the sector for the foreseeable future."

Watch: BoE forecasts strong COVID recovery with biggest economic bounce-back since WWII