Recession relief... but is borrowing about to spiral?

Some much-needed optimism to start the week as the EY ITEM Club, which uses the Treasury’s model for its forecasts and commentary, joins a growing consensus that Britain’s economy should avoid recession.

It also thinks the nation’s well-capitalised lenders can support this better-than-expected outcome, despite ructions in the international financial system that have forced several bank rescues, including the hurried takeover of the systemically significant Credit Suisse by larger rival, UBS.

A combination of (soon to be) falling inflation (we hope), lower-than-expected energy bills (seems nailed-on) and a resilient (for now) jobs market means ITEM expects UK GDP to grow by 0.2 per cent in 2023, rather than contracting as previously forecast.

It’s not much to write home about, but given we once feared the longest recession on record, even if a relatively “shallow” one, it looks like party time.

Total loans to households and businesses, meanwhile, are expected to rise 1.2 per cent this year (a net increase of £29bn), improving on February’s forecast which called for a 0.1 per cent fall.

When it comes to loans to business, the outlook still isn’t good. Bank-to-business lending is forecast to contract this year by a net 0.8 per cent. Small businesses, in particular, are struggling to access affordable credit and the interest rate cycle hasn’t yet come to an end. The number is still a marked improvement on February’s forecast of a 3.8 per cent contraction, and growth is expected to return in 2024 (1.7 per cent net), but this bears watching.

There is better news when it comes to the flatlining housing market, with 1.2 per cent (net) mortgage growth expected over 2023, up from 0.4 per cent forecast in February, with further growth of 1.8 per cent set for 2024.

Consumer credit is expected to jump by 6.5 per cent, from the 4.8 per cent in February’s forecast. There will be more to come (4.9 per cent growth) next year.

This may be where the real fly in the ointment lies. Sure, consumer credit used to fund things such as home improvements is no bad thing. Rising consumer confidence drives growth too.

But how much of ITEM’s expected rise will be accounted for by people borrowing to pay bills they can’t afford because of inflation?

The robust labour market, for all the talk of shortages, is still providing too many jobs that don’t pay very much – the sort of jobs that keep people in poverty and lead to unsustainable deficits in household budgets.

The gap is inevitably filled by borrowing. Raising alarm over this isn’t a case of bleeding-heart liberalism; this is an unsustainable and potentially dangerous situation. When the TUC says that Britain needs a pay rise, it isn’t wrong.

Future economic squalls start from the failure to acknowledge and address problems before they turn into crises.

Anna Anthony, EY’s financial services managing partner, appears to acknowledge that when she says: “Many businesses and consumers – particularly the most vulnerable in society – continue to face significant cost-of-living pressures. This cannot be underestimated, and appropriate support must still be provided.”

Indeed so, and not simply because it’s the right thing to do, it is also the pragmatic course to take. The outlook has become a lot more optimistic but downside risks remain and they are substantial.