Financial services will recover after suffering Brexit blip, says report
Britain's financial services will experience slower growth over the next two years owing to Brexit pressures but will start to recover by 2020, a new report shows.
Economic challenges - including higher inflation on the back of the pound's collapse - are expected to dent real income and knock consumer and business lending growth, according to the EY ITEM Club outlook for financial services.
However, the sector is expected to see lending and asset total rise in the long-term.
Mortgage lending growth is set to slow to 1.4% this year before dipping to 0.1% in 2018 but will "pick up" from 2019, with total mortgages set to rise from £1.1 billion in 2018 to £1.2 billion in 2020.
Meanwhile, banking assets - which totalled £7 billion in 2016 - are on track to increase by 1.5% in 2017 but "shrink slightly" in 2018 before growing to £7.3 billion in 2020.
The report notes that banks are in a "good position to weather challenging market developments" thanks to higher quality assets and investment in long-term business models.
EY UK's financial services managing partner Omar Ali said: "Brexit and wider geopolitics have injected a level of uncertainty and volatility we have not seen for some years but the fundamentals of the UK financial services industry remain strong.
"Lending is predicted to increase, perhaps not as much as we had hoped, but it is still growing.
"This is good news for the UK as a whole as it means financial services can continue to play an important role in supporting the growth of the wider economy."
The report comes ahead of the official trigger of Article 50 on Wednesday, which will launch Britain into Brexit negotiations with the EU.
UK financial services have urged policymakers to pursue a transitional deal that would give the industry more time to develop contingency plans given the Government's intentions to scrap membership to the EU's single market.
The EY ITEM Club latest report suggests the broader industry is likely to ride out Brexit-related challenges.
Business lending is set to steadily increase from a projected £414 billion in 2017 to £430 billion by 2020, while insurers are expected to suffer greater volatility owing to Brexit as well as recent changes to discount rates for personal injury claims, it explained.
Wealth and asset managers should expect a slowdown amid higher inflation, weaker economic growth and a rising pound - having benefited from rising equity prices on the back of sterling's collapse - the report said.
Assets under management (AUM) are expected rise by only 5.1% this year to £1.1 trillion but that is compared with 12.3% growth in 2016.
However, AUM is forecast to reach £1.2 trillion by 2020.
Mr Ali said: "The return of inflation and the resulting impact on disposable incomes could have a dampening effect on demand for financial products - a 0.3% fall in real incomes may not sound like much but it is worth £3bn to the economy.
"Hopefully, this benign economic outlook will give the industry the confidence to invest in the future and help to keep the UK industry at the forefront of the global market."