Weak Credit Still Hampers U.K. EconomySean O'Grady
Despite an injection of £90bn into the economy by the Bank of England, the flow of lending to businesses and home buyers remains extremely weak, threatening the economic recovery, according to the latest reports from the Bank of England and the Council of Mortgage Lenders.
In its latest Lending Survey, the Bank said that the supply of credit to businesses had slumped to its lowest level since June 2000 during April, and that the major commercial banks had indicated to it that the situation had not improved during May. Over 80 per cent of firms surveyed by the Bank said that external financing had become more expensive or difficult to secure over the past year. Gross new loan facilities granted to corporates amounted to £7.9bn in May, down from £9bn in April and £12.6bn in March.
What credit is available seems to be being made available only at a sharply increased cost, especially to those judged to be higher risks. The Bank said that, for example, the interest charged on credit cards had hardly altered, despite an easing in the cost of funding available to the banks, and that effective interest rates on overdrafts and personal loans have fallen by much less than Bank Rate.
Banks appear to have concentrated on improving their profit margins and rebuilding their capital positions more than they have heeded official pleas for them to help boost the economy, a trend discernible in the latest money supply data: annual growth of total M4 lending was a relatively robust 11.1 per cent in the year to May, but lending to households and firms grew only 1.2 per cent.
Some businesses had cut back on their demand for credit as they paid off debts and trimmed investment, says the Bank; but others are being forced into renegotiating existing facilities, often shorter-term and more costly than their existing lines of credit.
One of the few sectors where the Bank detected relative strength was in lending to real-estate companies, where the falls have been much less sharp than those to other concerns. One explanation for this, suggested the Bank, is that many loans were granted before the crisis, and banks had exercised forbearance to property developers in default.
The residential mortgage market has "continued to weaken", according to the Bank, a development underlined in the latest data from the Council for Mortgage Lenders, revealing a 58 per cent drop in gross mortgage lending from this time last year.
The CML's chief economist, Paul Samter, said: "It's likely that a moderate improvement in house purchase lending in May has been offset by very low remortgaging volumes as borrowers stay with existing deals."
Some City economists are predicting a further 10 per cent fall in house prices this year.
In the "real economy" the CBI said that a mildly improved outlook among manufacturers is being overshadowed by the failure of export orders to pick up – despite a 20 per cent decline in sterling since it peaked in 2007.
Meanwhile, and largely as a result of the anaemic state of the economy and consequently depressed tax revenues, the public finances are continuing to deteriorate at an alarming rate, with the largest monthly government borrowing in history – almost £20bn – seen in May. The Institute for Fiscal Studies said that government borrowing had increased more sharply over the past two months than the Budget predicted for the whole fiscal year.