The UK’s financial services sector is set for a slowdown next year and, for once, it has little to do with Brexit, according to the latest forecast from the EY Item Club.

Household income expected to weaken

The consultancy giant’s think-tank – the only non-governmental institution to use the Treasury’s model of the UK economy – predicted a fall in household income amid rising inflation would dampen demand for mortgages and general insurance going into the New Year, along with a fall in lending to business because of the uncertain political climate.And the report, Outlook for Financial Services, said the slowdown was likely to occur regardless of whether or not the UK reached a transitional deal with the European Union to smooth its departure from the bloc.“Conditions are likely to be tough next year as the effects of higher inflation on economic activity feed through and, whilst a gradual return to growth is expected in 2019 and 2020, the outlook remains challenging even with the prospect of a transitional Brexit deal,” said the report.On mortgages, the group suggested lending was likely to fall from around £1.19 trillion in 2017 to £1.18 trillion next year, before recovering in 2019. Business lending was also expected to decline, from £425 billion this year to £424 billion in 2018, before it, too, returned to growth in 2019.

Consumer credit expected to grow in 2018

Omar Ali, EY’s financial services managing partner, said, “Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country. Business lending, mortgage lending and general insurance look set to be the hardest hit.“Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit. A return to mortgage and business lending growth is forecast for the latter stages of the decade, but this does depend on the right deal being struck with Europe.“Both mortgage, and business lending to a lesser degree, are expected to drop back next year. This will naturally impact the real economy. Falling real disposable incomes and policy headwinds will make 2018 a tough year for general insurers and there’s also a risk of consumer credit growing out of pace with affordability as people try to compensate for the impact of inflation.”

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The report also forecast that car registrations would drop from a record 2.69 million last year to 2.42 million in 2018. But the life and pensions sector was expected to perform better and enjoy relative stability, supported by strong growth in equity markets.EY also reported that assets under management (AUM) reached a six-year high of almost £1.1 trillion in 2016, primarily as a result of the growth in equity markets and the boost to the value of overseas assets thanks to the fall in the value of sterling. The report suggested AUM would continue to rise over the next few years, albeit at a more modest pace, to reach £1.3 trillion by 2020.For related news and features, visit our Enterprise section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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