UK growth to remain slow thanks to low wages and debt

12 December 2017 Consultancy.uk

The next three years are likely to see a period of relatively low growth, according to a new study. In the short term, declining wages and rising consumer debt are likely to impact the banking industry, while asset management will continue to benefit from strong equity performances at home and around the world.

The UK economy is projected to see relatively weak growth this year and the next, following a relatively sluggish start to the year punctuated by uncertainties. Growth of 1.5% this year will be followed by around 1.3% next year, before returning to 2016 levels by 2019, at 1.8%.

One of the major drivers for the sluggish growth is a squeeze on household spending, which is  partly a reflection of negative real-wage growth. Household disposable income is projected to fall by 0.2% this year as government austerity measures continue to cut away at the UK’s  safety net and low-wage growth key factors. The current debt-fuelled spending is also likely to be hit by the Bank of England’s recent rise in interest rates, with Threadneedle Street having sent various warnings regarding the unsustainable nature of current lending levels.Headline resultThe report notes some bright spots as exporters in particular are sitting in a ‘sweet spot’ with a relatively low pound and a competitive employment environment. However, their unwillingness to invest the resultant profit due to Brexit uncertainties, and the prospect of the pound returning to strength, imposes a few challenges.

While the economy as a whole has entered a period of relative uncertainty and relatively low growth, the banking sector continues to see total asset growth go up from £7 trillion in 2016 to a projected £7.25 trillion this year.

The banking sector remains, in part, dependent on consumer sentiment in their willingness to take on additional debt. A relatively weakening job market, real wage decline, rising personal debt levels and regulatory interventions are being considered to stave off a repeat of the 2007 credit crunch, which may mean that consumers reduce or slow their exposure, thereby impacting the banks' revenue growth.
Borrowing costs have hit records lows
Total income for banks considered is likely to stay relatively stable at around £137 billion this year and the next, before rising to £143 billion by 2020. Banks continue to be affected by low interest rates, pressuring margins and a range of other issues.

Omar Ali, EY UK Financial Services Managing Partner, commented, “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. 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.”

Insurance and assets

The life insurance segment is set to see premium growth increase slightly, favoured by equity prices. The relatively stable equity environment,  recovering rates, as well as a fall in the pound mean that industry profit will stabilise at around £6.5 billion, rising slowly to around £7.4 billion by 2020.

The wealth & asset management sector is projected to see modest growth of around £90 billion in assets under management (AuM) between 2016 and 2017, largely due to gains in the equity market, while bonds add around £11 billion to the total. The rise was slightly more modest than the jump between 2015 and 2016, when AuM increased by more than 16%.
AUMs reached almost 60 percent of GDP in 2016 and are forecast to climb further
The future for the market looks relatively robust, even if growth is projected to slow. By 2020, AuM in the UK is projected to hit just shy of £1.3 trillion, with interest in bonds rising slightly as US Federal reserve set interest rates increase, while equities are set to be a relatively stable asset class. Given the relative economic uncertainties, the report suggests that some degree of diversification is likely over the coming period.

Ali concluded, “There’s been a lot of speculation about what will happen in the longer-term regarding Brexit and a transitional deal. That’s only right - given the importance of financial services to overall economic prosperity in the UK, it’s vital that the industry’s needs are front of mind during the Brexit negotiations. However, we can’t afford to lose sight of the short-term. Both mortgage, and business lending to a lesser degree, are expected to drop back next year. This will naturally impact the real economy. 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.”

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