In December, the Daily Telegraph wrote on the back of high inflation and the cost-of-living crisis in the United Kingdom “Get ready for the weirdest recession in history”. In January, the IMF predicted negative real GDP growth for the UK in 2023 of -0.6% which raises expectations for a material increase in non-performing loans (NPLs). In this note we review recent credit risk indicators beyond the NPL ratio using a newly released data application from the NPL Markets analytics platform.
While there is a clear expectation for increased credit risk, the actual indicators available thus far have not yet shown a substantial deterioration in loan performance. Interest rates on residential mortgages are at a 10-year high and more that 75% of mortgage borrowers will face an interest reset in the next two years increasing the pressure on household finances that are already stretched. Loan write-offs on UK mortgage and corporate loans overall are stable for now, but defaults on business loan guaranteed by the government under a COVID-19 scheme continue to rise and vary widely by originator. Business insolvencies in Europe in 2022 have risen sharply whereas they were stable in the UK.