Business loans to rise for first year since 2008

Tim Wallace
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BUSINESS lending will rise this year and accelerate into 2014, top economists forecast today, as the industry finally starts to recovery from the financial crisis.

The improving economy, better access to wholesale markets and falls in non-performing loans will all combine to wean banks off state support programmes like the Funding for Lending Scheme (FLS), the Ernst and Young Item Club believes.

Lending to firms has fallen every year since 2009, with the latest Bank of England figures showing a drop of 3.1 per cent in 2012.

But the Item Club expects lending to increase by three per cent to £440bn this year and another 8.7 per cent to £477bn in 2014.

“Behind the scenes banking fundamentals have quietly been improving and banks are now in a better position to be able to provide funds to the wider economy,” said Ernst and Young’s Andy Baldwin. “Our analysis suggests the main drivers of banks’ return to lending will be better access to wholesale funding and a decrease in non-performing loans, rather than the FLS making a material difference. That said the scheme is making a contribution in shifting emphasis and encouraging lending expansion across the sector while also helping to restore confidence and stimulate demand from consumers and small firms alike.”

The new Help to Buy Scheme is also expected to give a boost to the housing market – the analysts expect a 7.4 per cent rise in transaction numbers this year and 7.8 per cent next year.

However the economists’ forecasts also predict a sharp rise in the government’s borrowing costs in the coming years as the economy improves. Ten-year borrowing costs will rise from 1.7 per cent currently to 4.2 per cent by the end of 2016, the analysts predict – levels last seen in early 2010.