Cost-of-living pressures to drive rise in credit card borrowing - EY

Demand for credit from UK households is expected to rise this year as cost of living pressures bite, according to the latest EY ITEM Club UK Bank Lending Forecast, which predicts consumer borrowing will grow to a five-year high of 7.9 per cent in 2022 (equivalent to almost £16bn in net terms).

This is a trajectory reversal of the past couple of years when consumer credit fell by 12 per cent during the pandemic (over 2020-21) and reflects the expectation that consumers will increasingly turn to credit, and especially credit cards, to fund spending and cover bills.

The EY ITEM Club says inflationary pressures, exacerbated by the war in Ukraine, will prompt a significant rise in credit card lending. However, the related price increases of essential goods may force some households to cut spending on discretionary purchases and big-ticket items, creating pockets of suppressed demand for unsecured loans.

The rising interest rates and falling real incomes predicted for 2022 are also expected to reduce demand for other forms of lending. Mortgage lending growth, which stood at 4.3 per cent in 2021, is forecast to fall to 3.8 per cent in 2022 and 3.3 per cent in 2023.

At the same time, increased uncertainty and supply chain disruption may depress business investment, with knock-on consequences for business lending.

Anna Anthony (pictured), UK Financial Services managing partner at EY, commented: “Households are already feeling the cost-of-living squeeze and unfortunately this is set to worsen over the coming months, with inflation set to hit a 40-year high. If there are silver linings to be found both for consumers and for the firms financing lending activity, it 's that interest rates currently remain historically low and overall debt relative to income is also fairly low.

“The current economic pressures, exacerbated by geopolitics, are likely to weigh on appetites for most forms of bank lending, with the exception of credit card borrowing as people rely more on credit to finance essential spending. Banks though remain well capitalised and committed to helping consumers and businesses through this period of challenge, while also maintaining their focus on new regulatory requirements, sustainability pledges and the digital transformation agenda. The industry will also be focused, post-Brexit, on continuing to forge new international relationships and deals, ensuring UK financial services continues to maintain its leading role on the global stage. ”

Although economic conditions are moving back towards pre-pandemic norms, the EY ITEM Club predicts the business lending outlook for this year and next to be somewhat mixed.

In addition, firms face a more uncertain global environment, higher costs for capital goods and a rise in the corporation tax rate from 2023. According to EY ITEM Club analysis, this may make companies warier about investing and taking on debt.

Conversely, continued economic growth, the revival of sectors previously most-affected by COVID-19 restrictions and the incentive to invest offered by the super-deduction tax break could help boost demand for business loans.