The British economy faces several years of financial hardship with banks and insurers likely to suffer most in 2012, a report has suggested.
The UK was plunged back into recession last week, and a report by the Ernst & Young Item Club has predicted that insolvencies will go up to levels not seen since the 1990s.
The report also said that the faltering UK economy will also affect corporate lending by banks, with lending to businesses unlikely to recover to 2008 levels before 2016.
The Office for National Statistics’ revelation that GDP in Britain had shrunk by 0.2% in the first quarter of this year did not come as a shock to many in the industry.
“The double dip in recession comes as no surprise to us,” said Azad Zangana, a European Economist with asset management company Schroders.
“We have been forecasting another recession since last November when the Eurozone crisis intensified. Indeed, we are forecasting a further falls in GDP for the second quarter which will be caused by the extra special bank holiday to celebrate the Diamond Jubilee.”
The UK is not the only country to have fallen back into recession in the first three months of 2012 – it joined Belgium, the Netherlands and Spain, amongst others, after a dramatic fall in construction output.
According to the Item Club report, the bad news is set to continue for the financial sector. The report predicts that loans to businesses will fall by 6.8% this year – extending the contraction of 6.1% in 2011.
Write-offs on corporate loans are also expected to rise, increasing to 1.9% of loans in the corporate sector – compared to 1.6% in 2011.
“Although 1.9% doesn’t sound big, this will be the highest annual rate of write-offs since the mid-90s, and the more loans banks have to write off the less money they will have to lend,” said Neil Blake, a senior economic adviser to the Item Club.
“Consumer-led sectors such as retail are likely to be hit disproportionately hard as discretionary household spending is cut back amidst difficult labour-market conditions, especially in regions hit hard by government spending cuts.”
The report said that insolvencies are likely to be worst in the north east of England and Wales, as “economic output is set to contract by 0.1% and 0.3% respectively.”
The corporate sector is not the only area that is struggling financially at the moment. Retail industries and consumers themselves are also feeling the pinch as the economic downturn continues to bite.
