The trajectory of bank-to-business lending in the UK is set for a notable turnaround. After a modest increase of 0.5% in 2024, forecasts by the EY Item Club suggest that business lending will accelerate to 2.8% in 2025, driven by lower borrowing costs and improved economic conditions. This expected growth comes after a challenging period in 2023 when business lending contracted by 2.1%.
Current Economic Landscape and Predictions
In 2023, the UK saw a contraction in business lending due to high borrowing costs and a blend of macroeconomic and geopolitical uncertainties. These factors have subdued the growth prospects for this year to just 0.5%. However, as the Bank of England is expected to cut interest rates, a more favorable borrowing environment in 2025 is anticipated to catalyze a stronger growth in business lending, reaching 3.4% by 2026.
Technological and Environmental Investments Driving Growth
A significant driver for the anticipated increase in business lending is the growing necessity for companies to invest in digitalization and develop artificial intelligence (AI) technologies. Additionally, the shift towards green energy generation is prompting businesses to seek more funding to invest in these crucial areas. These investments are essential as companies adapt to a rapidly evolving technological landscape and strive to meet new environmental standards.
Loan Write-off Rates and Financial Stability
Despite the rising borrowing costs, the forecasted write-off rates on loans to UK businesses are expected to remain relatively stable, increasing slightly from 0.17% in 2023 to 0.2% annually through 2026. These levels are significantly lower than the 1%-1.5% seen in the early 2010s, indicating that many firms have been prudent in managing their debt levels since the global financial crisis.
Industry Insights
Anna Anthony, UK Financial Services Managing Partner at EY, remains optimistic about the resilience of the UK’s financial services industry amidst these challenging conditions. “With signs that economic momentum will build in 2025, cautious optimism is rising, and firms can increasingly look to accelerate their growth and innovation agendas,” she stated. Anthony emphasized the importance of the financial sector maintaining its robust foundation and capital position to remain competitive internationally, particularly in light of ongoing economic and geopolitical uncertainties.
Looking Forward
As businesses prepare for 2025, the landscape of UK business lending looks promising. Financial institutions are poised to support this growth, recognizing the importance of innovation and sustainability in securing long-term economic prosperity. Firms are advised to stay vigilant, keeping a close watch on costs and balance sheets while exploring opportunities for expansion and technological advancements.
In conclusion, as the UK economy gradually recovers and adapts to new challenges, the increase in business lending for 2025 is a positive sign of returning confidence and investment readiness among businesses, which could mark the beginning of a period of robust economic growth and innovation.
