The outlook for the UK financial services sector is better than many had hoped, the findings showed, but challenges remain in the the consumer credit, residential mortgage and business lending markets.
Equity markets should still perform well in the year ahead, despite recent turbulence as the worldwide uptick in GDP growth continues to support asset prices, the forecast said. Fixed income assets such as bonds are also going to benefit from gradual hikes in interest rates from the Bank of England, along with tighter monetary policy from the European Central Bank and the US Federal Reserve.
Consumer credit is expected to slow for the first time in five years, however, dropping to 3pc and then 2.8pc in 2019. This would be a sharp fall from the 8pc growth of 2016, and 6.9pc in 2017, and a sure sign of consumers reining in spending.
The drop off may also be a result of efforts from Bank of England policymakers to address what Governor Mark Carney described as a “pocket of risk” arising from high growth rates in unsecured borrowing, which could leave high street lenders vulnerable to economic shocks. As a result banks appear to have clamped down on their criteria for unsecured lending.
Inflation is set to fall from 2.5pc this year, down from 2.7pc in 2017, according to EY Item Club.
This will ease the pressure on household budgets, but there will not be a sudden uptick in real disposable incomes. The analysis predicts only a 1.2pc rise in spare cash in 2018, putting a fairly tight limit on consumer spending power. Retailers can only look forward to a 1.3pc lift in consumer spending, still well below the 1.7pc seen in 2017 and the 2.9pc boost of 2016.
Mortgage lending will have a sluggish year, growing by 2.4pc, just over half of 2017’s 4.2pc rate.
Omar Ali, of EY said: “Banks’ ability and desire to lend remains strong, and as we move towards a deal with Europe, the hope is that appetite to borrow will pick up, supported by the cut to Stamp Duty for first-time buyers.”
Auto-enrolment pensions will boost UK assets under management (AUM) in the year ahead. From April, employers’ contributions will rise from 1.pc to 2pc, reaching 3pc by April 2019. This growing pensions coverage will help continue, at a slightly slower pace the strong growth seen last year.
Assets grew by 14.6pc in 2017, reaching £1.24 trillion, equivalent to 61pc of GDP, in part thanks to a boost from the weaker pound. These factors will combine to push the total UK AUM to £1.5 trillion by 2020.
Mr Ali said that despite an improved picture, 2018 will “not be an easy year for UK financial services” as political uncertainty continues to weigh on consumer confidence. If, as hoped, a transitional on Brexit is secured however, banks can expect for a steady rise in lending again over the next few years.