Financial services facing muted 2018 but better outlook

● Economic growth offers hope despite continued strain on consumer spending

The UK’S financial services sector is set to experience another “challenging” year, but the outlook has exceeded expectations, according to new data published today.

The latest EY Item Club outlook for the industry pointed to a “subdued” 2018 for the consumer credit, residential mortgage and business lending markets as uncertainty over the UK’S exit from Europe casts a long shadow.

However, factors such as a stronger-than-expected economy and the expectation of securing a Brexit implementation period have helped improve the forecast for this and following years.

Annual growth in consumer credit is expected to slow in 2018 for the first time in five years, falling to 3 per cent and then 2.8 per cent in 2019. It marks a drop from 6.9 per cent growth in 2017 and 8 per cent growth in 2016.

Turning to inflation, this is forecast to drop to 2.5 per cent this year from 2.7 per cent in 2017, helping household budgets, but real disposable incomes are forecast to only rise by 1.2 per cent in 2018, tightening consumers’ purse strings. Consequently, growth in consumer spending is set to remain flat, rising by 1.3 per cent, compared to 1.7 per cent in 2017 and 2.9 per cent the year before.

The housing market is also predicted to remain sluggish this year, as high prices hit demand and supply is restrained by homeowners increasingly opting to stay put. Mortgage lending is forecast to rise 2.4 per cent this year, little more than half of last year’s 4.2 per cent.

And as for business lending, this is forecast to drop back by about 1 per cent this year to £385 billion as firms seek alternative sources of finance such as bond issuance. Business lending is, however, expected to pick up pace to £396bn in 2020 and £411bn in 2021.

Omar Ali, EY’S UK financial services managing partner, said 2018 “won’t be an easy year for UK financial services as Brexit uncertainties continue to linger, affecting consumer confidence”.

He added that with consumer spending expected to be restricted, there will be less demand for insurance, for example, as new car registrations fall, expected to drop in 2018 and 2019 by 6 per cent and 2.3 per cent respectively.

“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.”

A separate report published today found that UK business output has risen for the past two months, while confidence has improved, according to accountants and business advisors BDO. Its output index increased to 99.78 from 99.63, boosted by a strong improvement on the manufacturing side, which hit a seven-month high on robust world trade growth and a weaker pound.