Lending to UK firms set to remain weak this year

Continued high interest rates are expected to limit banks’ lending to businesses in 2024, before a rebound in 2025.

Economic forecasting group the EY ITEM Club said on Monday that it expects bank-to-business lending to grow by just 0.8% net in 2024. Although this is an improvement on last year’s 2.1% contraction, many UK firms are holding back on borrowing while the economic environment remains uncertain at home and abroad, and while borrowing costs remain high.

A rebound to 3.5% net growth is forecast for 2025 as inflation comes down further and interest rates are cut, boosting business appetite and confidence. Growth in digitalisation, adoption of artificial intelligence (AI) technologies and the move towards green energy generation are also anticipated to boost borrowing.

The forecast increase of 3.5% in lending next year would be the highest growth since 2020 when the UK government announced loan support during the pandemic.

Despite entering into recession at the end of 2023, falling inflation and energy prices, alongside expected interest rate cuts, mean that the UK economy is expected to return to growth in 2024. EY ITEM Club predicts that gross domestic product (GDP) will increase by 0.9% this year, followed by a 1.8% rise in 2025 and 2% in 2026.

There are signs suggesting that momentum in the economy will build, said Anna Anthony, UK Financial Services managing partner at EY.

“If borrowing costs and interest rates fall as expected, by next year we expect market confidence to have lifted markedly,” Anthony said.