No party spirit left as lenders set to snub government initiatives Lending to cash-strapped businesses and households is set to fall sharply this year, despite a raft of government initiatives to encourage banks to lend more, Ernst & Young warned today. The accounting firm also said that total income across Britain's banks could fall 2.5 per cent to £139 billion because of higher funding costs and increased competition for deposits, but it has predicted the wider economy will return to growth later this year. Official figures due for release on Wednesday are expected to show that Britain's economy has contracted for a third consecutive quarter, with analysts predicting a fall in GDP of up to 0.4 per cent for the three months to June. That would follow declines of 0.4 per cent in the final quarter of 2011 and 0.3 per cent for the first three months of 2012. Howard Archer, chief UK and European economist at IHS Global Insight, expects the economy to bounce back in the third quarter, with 0.6 per cent growth between July and September. Ernst & Young's summer Item Club forecast said that output has been hit by the impact of the extra bank holiday for the Queen's diamond jubilee, but it has pencilled in a return to growth in the second half of the year "as falling inflation brings about the long-awaited revival in household spending power." Inflation fell to a 31-month low of 2.4 per cent in June, down from 2.8 per cent the previous month but still above the Bank of England's 2 per cent target. The Item Club has predicted that corporate lending will drop to £422bn in 2012, a decline of 6.2 per cent compared with the previous year. The report said many large non-financial companies had excess cash balances to deploy, which would dampen demand for loans even when activity picks up. However, it added: "Smaller companies that do want to invest are likely to find access to credit is difficult in the current environment." According to the Federation of Small Businesses, four in ten firms have been refused finance from their banks, and the organisation has said it hopes the newly-launched £80 billion funding for lending scheme will help to improve access to funds. In a bid to help kick-start the economy, the Bank of England and the Treasury will offer money to banks under the scheme on condition that they pass it on to consumers and non-financial customers in the form of cheaper loans and mortgages. Carl Astorri, senior economic adviser to the Item Club, said: "Despite the government schemes that are coming into play, the contraction in overall lending this year will be even sharper than last year. The Treasury's funding for lending scheme looks promising, but although it should help to lower banks" cost of funding, banks will be very aware of companies" and households" heightened risk of default this year. Some banks may also be reluctant to access these schemes for fear of the stigma it could create in the markets. Along with the predicted decline in corporate lending, Ernst & Young said the outlook for consumer credit has worsened. In the firm's spring forecast, consumer credit was predicted to shrink by 7.6 per cent this year, but weaker-than-expected economic performance in the early months of 2012 means it is now forecasting a contraction of 10.5 per cent.