Consumer Lending Forecasted to Plummet in 2020

Forecasts suggest that the recession started by the COVID-19 pandemic may cause consumer borrowing from banks to plummet at the fastest rate ever recorded.

The forecasters at EY Item Club predict a 15.9% decline in the amount of money that banks lend to consumers via credit cards and personal loans.

A fall of that magnitude would be the greatest slowdown seen since records started back in 1993.

There have been big changes in bank lending patterns due to the COVID-19 pandemic and subsequent recession. Consumers have been spending less, and businesses have been borrowing more to keep themselves afloat during these uncertain times.

£15.6bn of consumer credit was repaid from March to June, according to new figures from the Bank of England.

The £7.4bn repaid in April alone was the largest amount ever recorded since data began being collected in 1993. April was the first full month in which social distancing and business restrictions were in force.

In contrast, there has been a large increase in the amount that banks have been lending to businesses. This is partly because of the government-backed loans that were made to keep businesses going throughout the lockdown.

There will be a 14.4% increase this year in business lending in comparison to 2019, according to EY Item Club forecasts. This is the biggest increase since 2007.

Banks have already begun to write off billions of pounds worth of loans as they anticipate a slow economic recovery and increased levels of unemployment.

A collective £9bn has been put aside by large banks during the second quarter of this year in order to offset bad debts.

Consumer credit should rebound in 2021 according to EY Item Club, however it will take until 2022 to see total stock of debt rise to the levels seen before the pandemic.

As rising unemployment stifles the housing market, EY Item Club forecast a 2.6% rise in mortgage lending, which is the slowest increase in the past five years.

EY’s UK financial services managing partner, Omar Ali, said: “Covid-19 has caused unprecedented challenges for the UK economy, putting financial strain on both businesses and households, and has resulted in a staggering amount of money being lent to firms over a short period of time.”

Ali added that a weakened economy, increasing write-offs on loans and slow consumer borrowing forecasts will “add pressure to their profitability and ultimately their ability to lend more”.