A hangman's noose outside The Prospect of Whitby pub, London, is seen Dec. 2, 2003. Background is the high cost housing developments and office blocks of Canary Wharf in London's docklands. ()

LONDON — The UK’s financial services sector is still set to suffer from a significant slowdown regardless of whether or not Britain secures a transition deal to smooth its exit from the European Union, according to the latest EY ITEM Club forecasts.

According to the ITEM Club, a branch of professional services giant EY that is widely respected, lending to businesses and mortgage lending are both set to slow next year as the economic realities of the Brexit vote start to hit home.

“Conditions are likely to be tough next year as the effects of higher inflation on economic activity feed through and, whilst a gradual return to growth is expected in 2019 and 2020, the outlook remains challenging even with the prospect of a transitional Brexit deal,” the report from the group, which is the only non-governmental institution to use the Treasury’s model of the UK economy, said.

The overall stock of mortgage lending will drop from around £1.19 trillion in 2017 to £1.18 trillion by the end of 2018, the report says, before recovering to just above its 2017 level in 2019.

Lending to businesses is set to follow a similar pattern, dropping between the end of 2017 and end of 2018, before recovering a little.

“Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country. Business lending, mortgage lending and general insurance look set to be the hardest hit,” EY’s UK Financial Services Managing Partner, Omar Ali said.

With the return of inflation since June last year, a real and painful squeeze is underway for British households. Inflation, at the last reading, is running at 2.6%, while wage growth was just over 2%. Inflation’s surge from close to zero reflects the growing cost of imports triggered by the crash in the pound since the referendum.

This means that Brits are essentially earning less than prices are rising, squeezing their ability to spend on discretionary items and pushing them to take on debt.

Ali says: “Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit. A return to mortgage and business lending growth is forecast for the latter stages of the decade, but this does depend on the right deal being struck with Europe.”

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