Long-term growth projected for financial services sector despite Brexit uncertainty

The rate of growth for all types of personal and business lending is expected to slow over the course of the next couple of years as real incomes weaken, but a pronounced pick-up is predicted in 2019 and 2020.

Growth in mortgage lending is set to slow to 1.4 per cent this year, and just 0.1 per cent in 2018, compared to 4.4 per cent in 2016.

However, it will pick-up from 2019, with the stock of total mortgages set to grow from £1,176bn in 2018 to £1,205bn in 2020.

Lending to business could reach £414bn in 2017, up from £406bn in 2016, and is expected to eventually climb to £419bn in 2019 and £430bn in 2020.

Consumer credit is forecast to increase from £193bn in 2016, to £200bn in 2017 and £216bn in 2020.

Omar Ali, EY’s UK financial services managing partner, said: “This is a key time for the UK’s financial services industry, just a day from the triggering of Article 50. Brexit and wider geopolitics have injected a level of uncertainty and volatility we have not seen for some years, but the fundamentals of the UK financial services industry remain strong. Lending is predicted to increase, perhaps not as much as we had hoped, but it is still growing. This is good news for the UK as a whole as it means financial services can continue to play an important role in supporting the growth of the wider economy.”

Following an 11 per cent increase in the total stock of lending last year – the fastest since 2008 - the UK banking sector will continue to grow, the EY ITEM Club outlook for financial services predicts. In 2017 the sector’s total assets are forecast to increase by 1.5 per cent, shrinking slightly in 2018 before growth returns in 2019, leaving total assets at £7,317bn in 2020 (up from £7,036bn in 2016).

The quality of assets has also improved and the investment that institutions have made in long term business models has left them in a good position to weather challenging market developments.

Following a year in which profits in the insurance sector fell by 23 per cent, to £7.0bn, 2017 should see an improved performance, buoyed by an improving global outlook.

Volatility, however, is likely to persist. As well as Brexit, the recent changes to the discount rates for personal injury claims – the “Ogden Rate” – will have far-reaching effects.

The changes to the “Ogden Rate” were expected, but the extent of the drop came as a shock and will particularly impact motor insurers and – in turn – premiums. And events may yet unfold further, as the Lord Chancellor is set to review whether a fairer framework of compensation may be introduced.

The EY ITEM Club outlook for financial services predicts that inflation, though still historically low, is set to climb to nearly 3 per cent this year and next.

After several years of historically low inflation this will serve as something a shock to both consumers and businesses. Combined with weakening growth in job creation and continued modest wage rises, higher inflation will lead disposable incomes to fall by 0.3 per cent (equivalent to around £3bn for the economy as a whole) this year, putting a squeeze on people’s pockets and dampening demand for financial products in the short term.

Weaker consumer spending may reduce demand for big ticket items - car registrations are predicted to fall back from the record 2.68m sold last year. Housing transactions are also expected to rise by just 4% this year and next, which is less than half the average rate seen in the last four years. The increase in Insurance Premium Tax, now at 12 per cent, will also provide an additional challenge to the industry, although the impact of the increase is unlikely to be passed on fully to consumers.

The EY ITEM Club outlook for financial services predicts that pressure on real incomes will hold back non-life premium growth to 2.3 per cent this year and 1.5 per cent in 2018.

Life assurers are expected to fare better, with recent rises in long-term interest rates providing support for annuity providers and the improved outlook for equities underpinning flows into life products.

The Wealth and Asset Management sector has benefited from better than expected economic momentum and growth in household wealth last year (which is expected to have risen by close to 9 per cent, an eleven-year high) and the spur to equity prices from a weaker currency.

The fall in sterling, coupled with the strong performance from the UK FTSE, meant 2016 delivered a far better year for Assets Under Management (AUM) than expected.

Total AUM grew by 12.3 per cent to just over £1tr, well up on the previous year’s 7.7 per cent rise. A slowdown over the next few years is expected as inflation rises, the economy slows and the effects of the depreciation of sterling begin to ease. AUM are forecast to rise by 5.1% this year to £1.1tr, reaching £1.24tr in 2020.

The share of the sector’s AUM in bonds is forecast to fall from 15.3 per cent in 2016 to 13.6 per cent at the end of the decade. Multi-asset funds are set to see slower growth in 2017, but will reach £192b by 2019, a 25 per cent increase compared to 2015.

Omar Ali concluded: “The return of inflation and the resulting impact on disposable incomes could have a dampening effect on demand for financial products - a 0.3% fall in real incomes may not sound like much but it is worth £3bn to the economy.

“Despite these headwinds, this forecast should be seen as encouraging. The outlook for the UK economy is much better than many envisaged even six months ago, and compares well to other developed economies. Long-term interest rates are improving and there is a prospect of the base rate rising. Hopefully this benign economic outlook will give the industry the confidence to invest in the future and help to keep the UK industry at the forefront of the global market.”