Business borrowing over 2021 will be negative as firms repay COVID-19 debt at pace
UK net business borrowing is on course to fall sharply over 2021 as firms pay down existing debt far faster than predicted, according to the latest EY ITEM Club for Financial Services Forecast.
The forecast estimates that net bank lending to UK businesses will fall to minus £1.6bn over 2021, following £35.5bn net being lent in 2020, before picking back up again in 2022 with growth of 2.4% (£11bn net). This represents a reversal of the May forecast, when the economic outlook at that time suggested firms would borrow a further £19bn in net terms this year to help them through the pandemic.
The COVID-19 pandemic triggered a surge in corporate borrowing, however, after an initial spike when firms took out loans largely for precautionary measures, many – especially larger corporates – have paid down their liabilities and strengthened their balance sheets.
Net lending via credit cards and personal loans is also set to end the year in negative territory, falling 0.7% on top of 2020’s 9.8% decline. This equates to a £1.4bn fall in the stock of consumer credit, as households have made more repayments than in pre-pandemic times and have used savings over loans at a greater rate.
In contrast, the housing market has seen strong activity this year, with mortgage lending forecast to rise 4% in 2021 – the fastest increase since 2007 – boosted by the stamp duty holiday.
Uncertainty surrounding the new Omicron COVID-19 variant, however, could affect the forecast going forward.
Martina Neary, head of financial services at EY in the Midlands, said: “The UK wide economic recovery over the spring and summer was thankfully faster and stronger than many anticipated. The housing market remained resilient, boosted by the stamp duty holiday, and consumers and businesses – especially larger corporates – were able to make bigger inroads than expected into paying off debt.
“As we head into Christmas and the New Year, the UK financial system remains resilient and well capitalised, making it well equipped to continue to support consumers and firms across the UK. This, along with the continued focus from Government on the levelling up agenda, should aid regions like the Midlands (which in many cases have been more adversely hit by the pandemic) with their ongoing recovery. The overarching outlook is one of increasing positivity, but we should maintain a level of caution, not least as the impact of the Omicron variant remains largely unknown.”
