Bank to business lending growth to halve amid global tensions

Britain's businesses are pulling back from borrowing just as the cost of money reaches its most attractive level in years, exposing a confidence crisis that threatens to stall economic momentum through 2026. Despite interest rates tumbling by more than a third in eighteen months, companies are choosing to hunker down rather than expand. The retreat reveals a fundamental disconnect between favourable financial conditions and business appetite for growth.

When cheaper money isn't enough

The mechanics of business confidence rarely reveal themselves so clearly. Rate cuts have historically acted as a reliable catalyst for corporate borrowing and expansion. When the cost of capital falls by more than a third in under two years, the textbooks say companies should be queuing up to fund new facilities, hire staff, and chase growth.

That script isn't playing out. Dan Cooper, EY's head of banking and capital markets, acknowledged that trading conditions are "likely to be challenging this year for businesses both big and small", though he maintained the outlook "is still one of growth". The gap between modest growth and genuine expansion plans, however, tells the real story.

Multiple forces are colliding to suppress business appetite for debt. President Trump's latest tariff offensive, which includes a 5 per cent levy on UK goods, landed over the weekend after his previous round of trade restrictions were struck down by the US Supreme Court. British exporters and supply chain managers now face renewed uncertainty about their largest overseas market.

When you combine uncertain export prospects with a squeezed domestic economy, the calculus for taking on debt shifts sharply.

The tariff threat alone doesn't explain the lending slowdown. Domestic pressures are equally significant. Tightening fiscal policy—shorthand for tax rises and spending constraints—has left companies questioning whether their home market will provide sufficient returns on borrowed capital.

The 2025 peak already feels distant

Last year's 6.9 per cent growth in business lending represented the strongest uptick since the pandemic, suggesting a genuine recovery was taking hold. That surge now looks increasingly like a brief window of optimism before conditions deteriorated. The speed of the reversal matters.

A halving of lending growth in twelve months signals that something fundamental has changed in how British firms view the immediate future. These aren't marginal adjustments to investment plans; companies are materially scaling back their ambitions.

For Britain's workforce, the implications are direct. Businesses that borrow typically do so to expand capacity, which means new hires and wage growth. Firms that pull back on borrowing freeze hiring, delay promotions, and look for cost savings.

What's interesting here is the disconnect between financial conditions and business behaviour. The UK banking system remains in a strong position to support households and businesses, according to the Bank of England's latest financial stability assessment. Central bankers have delivered precisely what the corporate sector claimed it needed: lower rates, stable inflation, and functioning credit markets.

Firms are responding by withdrawing rather than advancing, suggesting deeper concerns about Britain's economic trajectory that monetary policy alone cannot address.

The optimistic view requires a lot to go right

EY's forecasters believe the 2026 slowdown represents a "temporary" dip, with business lending expected to rebound to 4.5 per cent growth in 2027 and 4.8 per cent in 2028. Those projections rest on two critical assumptions: that geopolitical tensions ease and that the UK economy strengthens meaningfully. Neither assumption looks particularly secure.

Trump's weekend tariff announcement came after months of trade policy volatility, and there's little reason to expect predictability ahead. On the domestic front, the fiscal squeeze shows no signs of loosening, and the government faces limited room for stimulus measures.

The forecasts also assume that business confidence can snap back quickly once conditions improve. But confidence, once lost, tends to return slowly. The proportion of smaller businesses accessing finance has already fallen from 50% in 2023 to 43% by mid-2024, reflecting weakening business confidence even before the current downturn.

Companies that have deferred investment plans, cancelled expansions, or restructured for lower growth don't simply reverse course the moment headlines brighten. Hiring freezes become permanent cost savings. Shelved projects get forgotten.

Martina Keane, EY's financial services leader, urged banks not to let "a one-year dip in lending growth" deter them from "progressing longer-term strategies". That advice makes sense for institutions thinking in decades. For the businesses and workers facing 2026, however, temporary dips have a habit of reshaping employment prospects and industry dynamics in lasting ways.

The test ahead isn't whether British firms can theoretically access credit at reasonable rates. They can. The challenge is whether enough businesses will see opportunities worth borrowing for, or whether the current retreat marks the start of something more prolonged than a one-year pause. Recent data showing firms continuing to cut jobs despite signs of business activity rebounding suggests the caution runs deep.