Net mortgage lending is expected to grow by 1.2% in 2023, according to forecasts published by EY.

This is up from 0.4% reported by EY in February, after the firm upgraded its 2023 UK bank lending forecast for households and businesses due to the UK economy performing “better than expected”.

However, mortgage lending growth is still below the 3% averaged in pre-pandemic years – between 2015 and 2019 – in large part due to rising interest rates, reflecting a housing market which is likely to underperform the wider economy.

Total loans to households and businesses are expected to rise 1.2% this year, a net increase of £29bn, improving on February’s forecast which predicted a 0.1% fall, which was a net decline of £2bn. EY stated that falling inflation, lower-than-expected energy bills and a resilient jobs market mean UK GDP is expected to grow 0.2% in 2023, rather than contracting as previously forecast. This should also drive an increase in consumer and business borrowing, the firm said.

Unsecured lending is now expected to rise by 6.5% in 2023, a figure revised up from 4.8% in EY’s February forecast, and while business lending is still forecast to contract this year (-0.8% net), it has also improved on the previous forecast of a -3.8% contraction, as financial pressures from high inflation and supply frictions ease.

UK financial services managing partner at EY, Anna Anthony, commented: “We’re still on the path to economic recovery and 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, but we are in a more optimistic place than we were a few months ago. The recession that many thought was inevitable is now likely to be avoided and energy prices have fallen, boosting consumer and business sentiment. Despite recent volatility in the global banking sector, the EY ITEM Club has been able to upgrade its growth forecasts for UK bank lending this year, which is positive news.

“While encouraging, enthusiasm should be measured, in the short-term at least. UK banks continue to face a tough environment with historically low lending growth rates. However, the sector is in a strong capital position and continues to provide ongoing support to customers, businesses and the wider economy.

“With economic conditions expected to improve over the course of 2023 and into 2024, banks will be able to devote more of their time to other critical areas such as digital innovation, sustainability and governance.”

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