2018 is set to be another challenging year for UK Financial Services, but the outlook is better than many expected, according to the latest EY ITEM Club outlook for financial services.
Although the consumer credit, residential mortgage and business lending markets are all set to have a subdued 2018, the forecast for 2018 and the next few years is better than previously anticipated, due to a stronger than expected economy and the expectation of securing a Brexit implementation period. Inflation is set to fall and interest rates are forecast to rise gradually this year, albeit slowly, and from record lows.
2018 is forecast to see annual growth in consumer credit slow for the first time in five years, dropping to 3% and then 2.8% in 2019, as consumers hit the brakes on the amount of debt they hold. This is a fall from the previous highs of 6.9% growth in 2017 and 8% growth in 2016.
The stock of consumer loans is to increase only moderately to £213bn in 2018 (from £207bn in 2017), to £219bn in 2019, £226bn in 2020 and £235bn in 2021. Inflation is forecast to drop to 2.5% this year from 2.7% in 2017, which will ease the squeeze on household budgets, but real disposable incomes are forecast to only rise by 1.2% in 2018, constraining consumer’s spending power. As a result, growth in consumer spending remains subdued, rising by 1.3%, compared to 1.7% in 2017 and 2.9% the year before, as consumers look to rein back their spending.
Omar Ali, EY’s UK Financial Services Managing Partner, comments: “Although inflation will moderate this year, people are clearly taking a more cautious attitude to spending than in recent years. Whether this is in part a by-product of Brexit uncertainty, regulatory interventions, or because rising household debt is now having a material impact on spending habits, it means that banks should expect to expand lending at a slower rate this year.”
The housing market is predicted to remain sluggish this year as high prices hit demand and supply is held back by homeowners increasingly opting to stay put. Mortgage lending is forecast to rise 2.4% in 2018; little more than half of last year’s 4.2%. The stock of home loans will grow marginally from £1,204bn in 2017 to £1,233bn in 2018, followed by measured rises year on year, reaching £1,302bn in 2020 and £1,362bn in 2021.
Omar Ali continues: “Brexit uncertainty continues to affect overall consumer confidence. This feeds not only into how much people choose to spend on their weekly groceries, entertainment or eating out for instance, but also, understandably, into whether they choose to make their biggest financial commitment – moving house. 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.”
Business lending is forecast to drop back 0.9% this year to £385bn in 2018 (from £388bn in 2017), as demand for bank lending falls and firms looks towards alternative sources of finance such as bond issuance. Net new issuance of bonds and commercial paper by UK corporates in November 2017 reached the highest level since October 2009. A gradual pick up in business lending though is expected over the next few years to £396bn in 2020 and £411bn in 2021.
Omar Ali continues: “Although banks will lend less to businesses in 2018 than in 2017, the year on year fall will not be so dramatic. And, in 2019, lending looks set to turn the corner, with a £5bn cash injection into businesses in that first year of growth. However, firms’ growing use of alternative finance point to business lending remaining in a low-growth environment.
“Overall, UK banks look set for a stable year. Most lending is forecast to grow, if slowly. The industry is working tirelessly to prepare and hedge against any possible fall out of Brexit. Assuming progress in the negotiations continues and a transition period is agreed, the forecast is for UK banking to be relatively insulated from any Brexit impact from now through to the end of the period forecast (2021).”
The insurance sector is set for a mixed year. Motor insurers have been buoyed by the recent revisions to the Ogden Discount Rate for personal injury claims and the increase in premiums – average premiums now stand at record high, exceeding the previous peak reached in 2011. Home insurers though, will face growing pressures from the climbing cost of house repairs, largely reflecting an increase in the cost of leak damage and will be impacted by the slowing growth in housing transactions, dampening demand.
Overall, the EY ITEM Club outlook for financial services predicts that non-life premium income will rise by around 3% in 2018 and 2019, following 2017’s 2.8% growth rate.
The price of car insurance rose 10.6% in the three months to December 2017 compared to a year earlier – more than three times the rate of overall consumer price inflation. However, car registrations are forecast to fall further in 2018 and 2019 by 6% and 2.3% respectively – as people adopt a more cautious approach to car finance and diesel vehicles decline in popularity – before growth returns in 2020.
On the housing side, transactions are forecast to see an annual rise of 2.5% from 2018 to 2021, which will be down from the 5.9% growth averaged across the preceding five years, as demand is hit by the ratio of average house prices to income remaining close to a record high. Overall, home insurance premiums rose less than 2% over the course of 2017, implying a real-terms fall.
Omar Ali concludes: “2018 won’t be an easy year for UK Financial Services as Brexit uncertainties continue to linger, affecting consumer confidence. Consumer spending is expected to be reined in, leading to less demand for insurance as new car registrations fall and growth in the number of properties sold slows. But, the outlook is better than envisaged due to stronger than expected economic growth, and even though there will only be low growth in disposal incomes, lending is expected to rise steadily again over the next few years. This is of course based on securing a transitional Brexit deal in March and not crashing out in 2019.”