Growth in bank lending to UK businesses is expected to more than halve this year as economic uncertainty and higher costs prompt companies to take a more cautious approach to investment, according to EY.

Corporate lending is forecast to grow 2.1 per cent in 2026, down sharply from 5.3 per cent last year, according to the consultancy’s latest UK Bank Lending Outlook.

The slowdown comes as renewed tensions in the Middle East, higher energy costs and weaker economic activity increase uncertainty for British companies.

EY expects the weakness to be temporary, with corporate lending growth recovering to 2.8 per cent in 2027 and 3.9 per cent in 2028 as businesses increase spending on artificial intelligence, digital technology and other strategic projects.

The forecast contrasts with recent official investment figures. The Office for National Statistics said UK business investment increased 1.8 per cent in the second quarter and was 5.2 per cent higher than a year earlier, with buildings and structures making the largest contribution to quarterly growth.

However, EY’s forecast suggests companies will become more reluctant to finance new investment through bank borrowing as the economic outlook becomes less certain.

Martina Keane, EY’s UK and Ireland financial services leader, said geopolitical tensions were continuing to create uncertainty for businesses.

“While the bank lending forecast reflects the impact of global economic challenges, it is important to keep this in perspective, with growth still set to continue across all major categories,” she said.

Corporate borrowing has remained relatively subdued since the financial crisis, reflecting a longer-term shift in the way businesses finance themselves. Nevertheless, EY expects annual corporate lending growth to average between 2 and 4 per cent over the next five years, above its average during the decade to 2025.

The consultancy also expects corporate credit quality to remain relatively strong. Write-offs on business lending are forecast to fall from 0.18 per cent in 2025 to 0.17 per cent this year and 0.14 per cent by 2028.

Dan Cooper, EY’s UK and Ireland head of banking and capital markets, said the slowdown therefore reflected weaker demand for borrowing rather than mounting financial distress.

“Business investment, housing activity and consumer borrowing are all anticipated to remain subdued in the near term,” he said.

Across households and businesses, total UK bank lending growth is forecast to slow from 3.6 per cent last year to 2.9 per cent in 2026 and a three-year low of 2.2 per cent in 2027.

EY said stronger corporate investment should eventually help borrowing recover, particularly as companies commit more capital to AI and wider digital transformation.