Low interest rates fuel boom in personal borrowing

Net business lending is set to increase by £15 billion this year and by an average of 5 per cent a year between 2016 and 2019, compared with an average fall of 6 per cent between 2009 and 2014, the latest outlook from the EY Item Club has suggested.

With consumer spending forecast to increase by 2.8 per cent this year, consumer credit is set to rise by 5.7 per cent and by an average of 4 per cent in the three years to 2019.

Meanwhile, house price growth and rising incomes should help to push net mortgage lending up by 3.4 per cent this year, the fastest rate since 2007, though still below levels before the financial crisis.

The projected rise in business lending is supported by strong investment growth and low borrowing costs. On the flip side, however, the low-rate environment is a concern for the financial services industry.

Omar Ali, UK financial services managing partner at EY, said: “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.”

The share prices of financial services companies have been volatile as investor worry about the strength of banks and an extension of the low-interest-rate era. City traders were speculating last week that the base rate would be cut this year, after nearly seven years at its three-centuries low of 0.5 per cent, as global equity prices fell and amid fears about slowing global growth.

Despite concerns about the low price of Brent crude, which has been trading at about $33 a barrel, compared with $115 in the summer of 2014, and the impact of a slowdown in China, the outlook for financial services is positive, the EY Item Club concluded.

Ali said that “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, homebuyers and firms. If we can plot a course through the policy and politics, 2016 looks set to be . . . better”.

Martin Beck, senior economic adviser to the EY Item Club, said that the rise in consumer lending and spending, which meant that the household saving ratio fell to a record low of 4.8 per cent last year, was not a threat.

“With households predicted to exercise more prudence this year, the prospect of a rise in interest rates in the not too distant future and car registrations likely to fall back as pent-up demand diminishes, growth in consumer credit should ease in 2016,” he said.

“As growth in lending to consumers subsides, we expect this to relieve the pressure for regulators to intervene in the credit cycle.”

The outlook for the insurance industry and asset managers is mixed. Insurers’ profits are forecast to rise by 4 per cent a year between this year and 2019, compared with a 19 per cent jump last year, because of low interest rates, the increasing availability of alternative retirement products to annuities following a government shake-up of pensions regulations and rising competition from asset managers.

Assets under management are expected to rise to £1.2 trillion this year, approaching 60 per cent of GDP, up from last year’s record high of £906 billion, as low rates encourage appetite for risk, households grow richer and the number of people aged 65 and over continues to rise.