UK firms slash borrowing to reduce swelling debt burden

British businesses are set to slash borrowing this year as firms repay debt to repair the damage inflicted on them by the Covid-19 crisis, according to a new report released today.

A return to normal patterns of economic activity after the disruption caused by the pandemic will drive a sharp pull back in business borrowing, research by the EY Item Club has found.

In 2020, businesses took on over £35bn on net in loans as firms stocked up on funds to offset pandemic disruption.

However, this year, net business borrowing will drop to minus £1.6bn, caused by businesses repaying vast sums of debt taken on during the worst of the Covid-19 crisis.

A rise in borrowing costs triggered by the Bank of England hiking interest rates is likely to weigh on firms’ appetite for debt in the coming year.

Greater emphasis on repaying debt will weigh on economic growth due to firms shifting focus from investing to cutting their liabilities, the EY Item Club warned.

Anna Anthony, UK financial services managing partner at EY, said: “Focus on repayment is a double-edged sword; while the debt burden for many has been reduced, the focus on loan repayment over investment will have a long-term impact on growth.”

Borrowing will recover to £11bn next year caused by the spectre of the pandemic over the economy receding improving business confidence in their long term outlook.

As a result, investment spending will jump 14 per cent next year, partly reversing a prolonged downward trend in business investment since 2016, the EY Item Club said.

The stamp duty holiday, dash for space and a record low interest rate environment has fuelled red hot demand in the housing market.

Mortgage lending is set to rise £60bn this year, the fastest rate of growth since just before the financial crisis.

Consumer credit will shrink this year “largely due to consumers making more credit-related repayments than expected, using a higher percentage of savings than normal, accumulated during the lockdowns, to fund big ticket purchases in place of credit,” the EY Item Club added.