UK Economy: Financial growth on the way as Osborne told to “hold fire”


March 2016

UK Economy: Financial growth on the way as Osborne told to “hold fire”

According to forecasters at the EY Item Club, the financial services sector could see a good level of growth in the coming years.

The analysts predict that mortgage lending, consumer credit and business borrowing will grow at a steady pace, as the country’s economy recovers from a series of heavy losses on the stock markets.

The level of demand for business loans will be boosted by an increase in business investment growth and lower borrowing costs. The analysts predict that the next five years will see net lending to businesses grow by an annual rate of 5%. This is a strong turnaround from the 6% per year decrease that was witnessed between 2009 and 2014.

The EY Item Club also predict that growth in consumer lending will start to steady out after last year’s surge; they are now forecasting 5.7% growth in 2016, followed by 4% annual growth in the three years to 2019. It is understood that much of the growth in 2015 was due to a huge increase in the purchase of vehicles, which led to an all-time record being set for the highest annual number of new car registrations.

Household incomes and house prices are also set to continue growing at a good pace, which is expected to contribute to a higher rate of mortgage lending, and whilst the UK’s total mortgage debt growth rate is still well below the heights it reached before the economic crash, it is predicted to grow by around 3.4% in 2016- the most growth seen since 2007.

The UK financial services managing partner at EY, Omar Ali, said:

“2015 was the first year for some time that the underlying economic fundamentals were good enough to support an across-the-board return to growth in borrowing by consumers, home buyers and firms.”

“If we can plot a course through the policy and politics, 2016 looks set to be a better good year.”

“However, the delay in any UK interest rate rise is causing some concern. Until rates rise, banks are going to struggle to increase the gap between lending and savings rates, and the prospect of higher returns for asset managers and insurers is pushed even further out.”

Osborne should "hold fire" on cuts

However, this positive outlook comes with a caveat; the EY Item Club has issued a warning to The Treasury that George Osborne should “hold fire” on his planned spending cuts, which he is set to announce in this week’s Budget.

The analysts have cautioned that cuts to government spending could have an adverse effect on the British economy, predicting that forecasts for UK growth could be cut to as low as 2% if the Chancellor goes ahead with his austerity measures.

Mr Osborne has stated that he wants to make cuts “equivalent to 50p in every £100” of government spending by 2020. In the March Budget, to be given later this week, the Chancellor is expected to outline the details of the government’s new Help to Save scheme. The scheme is aimed at providing low-paid workers with up to a £1,200 top-up to their savings over the next four years.

A senior adviser to the EY Item Club, Martin Beck, said:

"You could argue the low-hanging fruit - the easy cuts - have already been made and cutting further is actually going to be pretty tricky.”

He went on to say that the government should be trying to boost the country’s economy so that it is better placed to deal with what Osborne himself has described as the “cocktail of threats” being presented by the global economic climate.

He added:

"That's what's caused us to think maybe the chancellor should be careful here and not potentially make a weak economic situation weaker,”

The firm are currently predicting that the Chancellor will achieve his target of running a surplus by the end of this parliament. However, they predict that the surplus will only be around £4bn and not the £10.1bn that was forecast by the Office for Budget Responsibility.

This forecast comes in spite of lower GDP growth, smaller estimated tax revenues, falling share prices and poor wage growth, the firm said.

"This bad news will be mitigated by the prospect of lower government spending, due to the impact of lower gilt yields and inflation on debt servicing costs," it explained.

BCC cuts growth forecast

Last week saw the BCC (British Chamber of Commerce) lower its forecast for UK growth to 2.2% from 2.5%. The body, which represents 100,000 businesses in the UK, said that this came as a result of “global headwinds and uncertainty”.

The body’s acting director general, Dr Adam Marshall, said:

"Obviously we've seen the turmoil on the financial markets in recent weeks, we've seen commodity prices and the price of oil, in particular, up and down.

"You've got economies elsewhere like the eurozone with huge stimulus measures unveiled yesterday where there are questions about the future performance of those economies and, of course, you've got the kind of political uncertainty in place like the Middle East.”

The BCC also said that predicts that the services sector will continue to be the main driving force behind the British economy in the years to come.

The organisation recently found itself at the centre of an unwanted controversy due to comments made by its former director general, John Longworth.

Mr Longworth resigned from his post after stating that the UK’s economic future could be “brighter” if it were to leave the European Union. The comments were made in a speech that he gave at the party’s annual conference.

Dr Marshall insisted that Longworth had not been forced to resign and that the decision had been made mutually.

"We have a long standing position of neutrality on the EU referendum debate," he said.

"Of course, that was demanded of us by our owners the local Chambers of Commerce up and down the country and that's because there are very real division in local business communities."