Economy set for double-dip recession
June 20th, 2009The drop in bank lending to business just reported by the Bank of England, the biggest in 9 years, sends a deeply disturbing signal about the future course of the economy and escalating unemployment. The Bank figures show that the annual growth rate in lending which averaged 17% last year fell sharply to 8% in January this year and then continued to fall steadily further to 5.7% in February and 4% in March. In April it fell even more dramatically to a mere 1.3%, a reduction in lending in that month alone of £5.4bn. This is all the more alarming when the Government has already fired what is virtually the last shot in its locker – the device of quantitative easing (in effect printing money) which in two tranches has increased the money supply by £125bn. What then should be done to prevent this downward trend turning into a vicious spiral?
Businesses finding it harder or more expensive to get finance have responded by cutting investment. Lenders then retort that demand for new credit is limited by weak investment intentions and by firms’ need to reduce debt levels. It is true that corporate debt write-off has nearly trebled over the year to March 2009 to £0.9bn. But other evidence suggests that demand for new credit is still strong: many firms are now entering into early refinancing arrangements in order to be guaranteed future funding so that their auditors are better able to give assurances of the company’s future viability.
What is really missing is enforcement of the pledge given by the nationalised and part-nationalised banks to increase their lending substantially. Gordon Brown told me at PMQs on 10 June that bank lending to small businesses had increased by £75bn; I don’t see how this can be either compatible with the Bank of England’s latest data or with the M4 lending figures to businesses and homeowners which show a collapse in the annual growth of lending from 19.8% in February 2007 to just 0.3% in April this year. I have therefore written to him to ask for an explanation (or the withdrawal of his figure as not quite correct). But whatever the precise figures, the real point is that the banks are cheating – they’ve scooped up all the taxpayers’ money – £650bn of it – and then reneged on their side of the bargain to ratchet up lending. And Gordon Brown is letting them get away with it. Perhaps, just as he told the recent CBI dinner that he was sorry about imposing a 50% tax rate on the very rich and that he never wanted to do it, so he may have told the banks he never really meant to force them to increase their lending!
The picture is just as bad over mortgage lending. Reports of green shoots in the housing market are decidedly premature, with gross mortgage lending (according to the Council of Mortgage Lenders) down 2% in May compared to the month before and down no less than 58% compared with May last year. Lending has fallen from £30bn a month in early 2007 to £25bn a month a year later, and it has now plummeted to just £10.3bn a month in May this year. This is already having drastic effects, with many buyers forced to provide deposits of as much as 25%, and their inability to do so then increasing job losses in the finance and construction sectors.
June 23rd, 2009 at 12:54 pm
I absolutely concur with your reservations regarding the future of our economy and unemployment with the Bank’s position on lending to businesses.
As a business owner servicing the UK manufacturing sector, I wish to point out another major problem being faced by our industry; namely the continuing withdrawal of credit lines by many of the prominent insurers. They are citing economic conditions, market expectations and increasing insolvencies as major factors influencing their decisions. It is also my understanding that insurers are employing a “confidential stress test” on a company’s management figures, which has been revised since entering the credit crunch of 2008. This is making it almost impossible to grant credit unless the company’s balance sheet is very healthy and strong. However, even in some of those cases, credit is often being withdrawn or greatly reduced.
I am aware that the insurers have suffered increasing losses in recent times (not only in the UK) and have to ensure that credit limits are managed and maintained at appropriate levels for the current economic climate. However, to sytematically cut or reduce credit lines on a daily basis in order to reduce their risk and exposure, whilst still taking the client’s premium is both immoral and foolish.
Firstly it is immoral in that the premiums are normally set based on a company’s projected turnover. By removing large numbers of credit lines on a company’s client base, the projected turnover is vastly reduced, however the premium remains the same. Secondly it is foolish in that the removal of suppliers credit lines on a company can have a severe and immediate impact on it’s cashflow. We are all aware that “cash is king” and that many company’s fail purely through starvation of cash rather than an unhealthy orderbook! Therefore the position being adopted by these insurers is somewhat short sighted and can only serve to “fuel the fire” in terms of company failures!
In the recent budget, the government introduced the idea of a “credit insurance guarantee scheme” in order to alleviate the credit line problems being encountered. I am given to understand that the idea is based upon an unproven French model which has shown limited success. It would seem that the scheme can only be offered at the point of a cover reduction and not when a limit is either removed or when a request for a higher limit is refused. In my mind this “top up scheme” is a very short term view with very little benefit to our overall position on credit confidence. This view is substantiated by the fact that the scheme only lasts for six months. The goal surely has to be resolution on a long term basis. Credit Insurers need to be seen to collaborate with companies with sound credit management practices, encouraging flow of upto date information with a view of supporting those companies as best they can.
Clearly, with lending at an all time low coupled with the squeeze on credit insurance (not to mention the erosion of manufacturing and escalating fuel costs), running a business in the UK in 2009 is exceptionally difficult indeed.