UK financial services should brace itself for a less than buoyant near-term future, according to a closely watched barometer, as lending activity falters due to a combination of stagnant wages and higher inflation.
Lending - and the interest charged on it - is one of the key profit drivers for financial services.
After some relative highs in 2016, the overall rate of lending growth is set to slow in 2017 and even turn negative in certain cases in 2018, according to the EY Item Club outlook.
It predicts mortgage lending will fall to £1.1trn in 2018, compared to a forecast £1.2trn in 2017, though it is expected to gently pick-up in 2019 and 2020.
Lending to business is also expected to drop back marginally in 2018, before gradually climbing the next two years.
The EY Item Club pointed to a combination of higher inflation and stagnant wage growth as reasons why borrowers would shy away from taking on anymore debt in the near-term.
Inflation is set to peak at just over 3 per cent in the second half of this year – the fastest rate since 2012. This, combined with subdued pay growth, means 2017 is set to be a year of falling real earnings.
Real household disposable incomes are also forecast to decline by 0.2 per cent this year, the first drop since 2013, which is likely to dampen demand for mortgages and general insurance heading into 2018.
Omar Ali, UK financial services managing partner at EY, 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,” he noted.
Higher inflation, however, could support demand for consumer credit, the Item Club report noted, if households attempt to compensate for the hit to real incomes by borrowing more.
The stock of consumer loans is forecast to grow from £204bn in 2017 to £206bn in 2018, before rising to £212bn in 2019 and £218bn in 2020.
Mr Ali stated: “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.”
The slowdown in lender activity “will naturally impact the real economy,” he commented.
“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,” he concluded.