The long-awaited final report from the Independent Commission on Banking was released this morning.  The headlines have focused on the timing and costs of the proposed structural reforms.  But it is the lack of competition in the UK banking sector where the real frustration amongst many companies lies. 

In recent weeks we have heard from a company which approached a High Street bank and was told it would not even provide a quote for banking services.  A number of others have advised us that another bank will not do business with their sector.  The SME finance monitor also recently showed that around one in seven companies with a successful application for external finance were seriously considering switching banks, but we know that switching rates are considerably lower than this.  All in all, none of these are the hallmarks of vigorous competition in the banking sector. 

We've been consitently looking for government provide a boost to competition in UK banking.  Our recommendations include:

• Committing to stronger competition in the UK SME bank lending market by following through on the Commission’s call for a greater number of Lloyds’ branches to be sold;
• Looking seriously at impediments for SMEs (larger than micro) switching between banks, including the lack of difference between banks’ offers;
• Improving sources of finance beyond the banking sector for growing SMEs, including equity finance and non-bank debt, for example through extending the Enterprise Investment Scheme to debt;
• Greater transparency and publication by banks of the factors behind certain lending policies and conditions and increased transparency on ancillary costs associated with lending.

So what did the ICB have to say?

There are three main recommendations with respect to improving the competitive landscape.  A strong new challenger in the market as a result of the Lloyds divestiture, improving switching and increasing transparency for consumers. 

On switching, the Commission is recommending that a current account redirection service is established by September 2013 to smooth the process for individuals and SMEs.  The Commission also regards transparency as a 'crucial couterpart' to improving the switching process.  It is recommending that the Financial Conduct Authority and the Office of Fair Trading works with banks to improve transparency in costs and pricing across all retail banking products, including those for small businesses.

The ICB has provided some clear direction on where action needs to focused and this should broadly be welcomed by businesses. 

So what now?      

Well, government had already broadly endorsed the Commission’s interim finding in April that some form of separation was necessary between retail and investment banking.  If there is genuine concern about credit conditions for SMEs and real ambition to make the UK the best place in the world to grow and finance a business then we need to hear much more about implementing the Commission’s recommendations on boosting competition.  As a first step this will require government now to equally endorse the Commission’s proposed reforms to boost competition and set about implementing these recommendations with urgency.

In the third of our posts this week on Economic Prospects for the year ahead, we turn to the international outlook - key to globally focused and exposed sectors, such as manufacturing.  However, we do so against a backdrop of a further round of eurozone crisis meetings as the debate on what to do about Greece (...Ireland and Portugal) looks set to spread to other periphery economies.  We'll return to some of the many and potentially sigificant downside risks to our forecast tomorrow.

Our starting point is a strong recovery in global economic activity through 2010 and a decent 2011q1, where the IMF estimated growth of over 4% in the first three months of this year.  While emerging economies continued to lead the pack in the first quarter, some advanced economies – notably France and Germany – posted solid quarter-on-quarter growth of 1% and 1.5% respectively. 

However, in the first half of this year there have been a number of significant events that economic forecasts couldn’t have accounted for – the Japanese earthquake and consequences for global supply chains and production and the spreading social and political tension across the Middle East region.

Even looking through these events the economic data that has begun to emerge for the second quarter of this year raises question marks about whether the global recovery is having a temporary wobble or whether the outlook is for a more prolonged period of weaker growth. 

Any forecast for the eurozone this year will inevitably mask huge variations in performance. 

In Germany, output is now back to pre-recession levels.  With business and consumer confidence indicators continuing to improve in Germany and France, growth for the year as a whole is expected to come at 3.5% and 2.2% respectively.  Elsewhere in the eurozone - and looking particularly at the fringes - the challenge of fiscal retrenchment will continue and medium-term prospects for growth look fairly dismal.   

In the US, the picture is looking less rosy than only a few quarters ago when growth was fairly broad based across the economy.  Recently the US has seen some softening of consumer spending and production, house prices are still falling and consumer confidence levels remain well below those recorded pre-recession.  This has led to a downward revision in our central forecast since the start of the year to 2.5% growth in 2011 and 2.9% in 2012.  And today the Fed chairman indicated that further monetary policy support was still on the table.

Looking to emerging Asian economies the problems have not been growth but inflation.  Commodity prices, including food, have been on a strong upward trend through this year.  With concerns of overheating, China, India and Brazil have embarked on significant monetary tightening since 2010 which will inevitably come at the expense of growth this year. China and India should still post respectable growth of 9% and 7.6% respectively.  China has set a less ambitious target for growth for the duration of its next five year plan, with a greater emphasis on boosting consumer spending as much of the much needed rebalancing process.    

Over the next six months it will become clearer whether the BRIC economies will be able to manipulate a soft landing, Europe can take decisive action on Greek debt woes, Middle East tensions will be contained and the US can maintain momentum behind the recovery and create jobs without another round of stimulus measures.  The UK’s drive for economic rebalancing means the performance of the wider global economy counts.  The multiple risks on the horizon could yet combine to create some very strong headwinds for the global recovery.  

For more than two years EEF has been tracking credit conditions across manufacturing and that survey, together with the Bank of England's various reports on lending have provided a fairly solid picture of a financial sector struggling to recover post-crisis and a large segment of SMEs at the sharp end of higher costs and reduced availability.

Today BDRC Continental, a market research company commissioned by the Business Finance Taskforce, published the results from the first of its quarterly surveys of 5000 SMEs. 

Some of the results will not comes as a surprise to anyone that's been tracking lending conditions - approval rates on overdrafts have been higher than loans over the past 12 months; smaller, younger companies have been facing a more challenging lending environment than older, larger SMEs and it's easier to renew existing facilities than have new ones approved. 

However, the survey does shed a bit of light on some new areas. 

Firstly, the proportion of 'unrequited' SMEs - that is companies that have had a need for external finance over the past year, or expect to in the next 12 months but have not approached a bank and have no plans to.  The survey puts this group at 15% of SMEs in the last year.  Some have been put off by current economic conditions.  But many more have been put off by their perceptions of the process or have been discouraged by their lender following an informal approach. 

Is 15% a lot?   The survey only provides us with a snapshot in time.  We don't know how widespread reluctance to seek external finance would be in more 'normal' circumstances.  But the survey shows that half of those that had needed an overdraft and two thirds of those that wish they'd applied for a loan said that the decision not to apply has impacted on their business - suggesting the issue of discouraged ... or 'unrequited' demand is hardly a marginal one.  This is a question it will be worth keeping an eye on in the coming quarters. 

The second area of interest is the percentage of SMEs that have seriously considered changing banks in the past year.  Around one in seven companies that have had a successful credit event in the past year have considered switching and this (not surprisingly) rises to over two in five for SMEs that have had unsuccessful credit applications.  Despite this cases of SMEs switching banks remains relatively low - giving further weight to an argument we've made here numerous times before about insufficient competition in the sector.

All this leaves us with a bit more of the complex SME lending picture.  But it doesn't reveal anything that - at this stage - changs our view on where more progress still needs to be made:

- Rebuilding sources of finance beyond bank debt
- Boost competition in the banking sector and
- improving real business understanding across the financial sector

The next blog is our series focuses on what the remainder of this year holds for the UK economy.   

The consensus view has now converged towards fairly mediocre GDP growth in q2.  Given the disruptions following the disaster and Japan and the many bank holidays over this period, whatever the first release tell us later this month, it won’t be much about the underlying health of the recovery. 

So looking to q3 and beyond our central forecast for the UK economy is a continuation of the modest recovery we have seen in the first half of 2011. Weak growth in consumer spending and contractions in government spending will be somewhat offset by stronger contributions from investment and net trade as the economy continues to rebalance.   

Consumer spending is being dragged down by falling real wages on the back of high inflation and subdued wage growth. After growth in the range of 0.2% to 0.3% quarter-on-quarter for the rest of the year, private consumption is expected to pick up gradually in 2012, although annual rates of growth even in 2012 will be meagre compared with the decade leading up to the recession.   

Spending by government will also be a drag on growth.  The start of the fiscal year in April means reductions in government consumption begin to bite with quarter on quarter contractions forecast for the remainder of 2011 and right through 2012. 

Growth in exports in goods and services is forecast to exceed 7% annually in both 2011 and 2012, well ahead of imports growth at 2.3% and 3.8% respectively, ensuring that net trade adds to overall growth in both years.  However, we will not see a net trade contribution of the magnitude posted in the first three months of this year. 

Since the recovery began in 2009q4, it has been characterised by continuing uncertainty and fluctuating outturns in the official data. Reflecting this, our central projection faces both downside and upside risks.  

On the downside, the risks are largely international ones.  Further rises in commodity prices offer the potential for feeding through to higher inflation, particularly concerning if this moves inflation expectations up. The eurozone crisis has intensified, with the once unthinkable possibility of a Greek default looking likely and uncertain consequences for the UK.  Further afield, recent cooling in commodity prices may indicate a weakening in demand from China, a key source of growth in UK exports. 

On the positive side a stronger performance than currently expected in the labour market could help boost modest expectations for consumer spending in 2011.  And an easing in credit conditions, particularly for smaller firms, may see investment intentions materialise into greater actual investment. 

Tomorrow we’ll be homing in on three areas to key an eye in on in the coming quarter – the indicators that will tell us whether the recovery is still on track or knocked off course.  

In 2010 both the Chancellor and the Governor of the Bank of England were at pains to suggest that given major uncertainties the economy faced a ‘choppy’ recovery.  Economic data for the year so far have borne this out.  Over the next week our blog will look at what the rest of this year might hold.

But first where have we got to with the recovery to date? 

The start of this year saw the last contribution from government spending to overall growth as the new fiscal year heralds the beginning of fiscal retrenchment in earnest. The spending cuts are also part of the story weighing on consumer confidence as the private sector attempts to absorb public sector redundancies. This fits with further drags on consumer spending from falling real wages, a weak housing market, and a need to deleverage.

Business investment has been very patchy, contracting in 2011q1. The strong investment intentions reported in surveys are not yet translating into firm outturns.  Companies’ cash positions are strong but SMEs are struggling to access finance to help drive investment.

External demand has been an important factor in driving the recovery in the first half of 2011. Emerging markets have been the major source of strength for the majority of the recovery but in early 2011 European markets provided some strength, though Europe remains sharply divided between the core and the periphery. 

Materials prices continued to rise into early 2011 with oil prices in particular jumping in response to Middle East turmoil. This has fed into uncomfortably high inflation.  Despite concerns about strong price increases Bank of England policy makers have been split on rate changes this year.  Concerns from some members about inflation expectations drifting higher have been offset by continued concerns about sub-par growth.      

An unexpected disruption to global manufacturing supply chains, particularly in the automotive sector, followed the earthquake and tsunami in Japan in March.  But the impact has largely proved to be temporary.  Survey data for the first half of the year shows continued expansion in manufacturing activity with the sector now posting six consecutive quarters of growth. 

The second quarter of this year has proved to be more challenging for manufacturing and the wider economy.  In our series of blogs on economic prospects for the remainder of the year we will discuss our central forecast for both the UK economy and key international markets.  We’ll also highlight what would indicate a significant drift from our forecasts and the events that would suggest everything is going to plan and the things that could go really wrong.  Finally, we’ll take a glimpse at the outlook beyond 2011. 

In our experience Budget statements always bring the good, the bad and the ugly.  In our blog last week we outlined the six areas where we really needed to see some tangible progress from the coalition if our economy is to generate better balanced, sustainable growth. 

This Budget had to be about more than government getting out of the way.  Government needed to hard look at the UK's business environment and, importantly, how it compares with other economies also seeking to boost growth throught investment and exporting.  And then take steps to ensure that companies with ambitions to invest and innovate start to see that it makes commercial sense to do that here in the UK.

What we got were some measureable steps in that direction. 

Specifically we got a signal that the government gets how manufacturers invest with an extension in the Short-Life asset regime - something that EEF has been campaigning hard on.  Extensions of the R&D tax credit for SMEs this year and next are welcome but the potential for further change in the coming consultation in May will be eagerly watched. We'll be looking for the definition to be broadened to include more development activity and for the rises to apply to all firms.  

A bigger cut in the headline rate of corporation tax isn't to be knocked, nor is the commitment to more apprenticeship funding.  The were some strong words on deregulation, particularly the Prime Minister's intention to take the battle to Brussels - we'll have to wait to see if that can deliver.   

Further, the government's Plan for Growth provides a parliament-long commitment to improving the UK's competitiveness through the tax system, the environment faced by start-up businesses and those looking to grow, boosting exports and investment, and lifting the education and flexibility of the workforce.

However, the bad and the ugly came on the environmental tax measures.  We saw further evidence of the coalition’s continued willingness to forge a path ahead of major competitors in its aggressive response to climate change. The introduction of the carbon price floor from 2013, rising to £30/t in 2020 is well above forecasts of where the price of carbon will go through the EU-ETS. EEF continues to caution against advancing climate change policy at the expense of UK industry’s competitiveness.

But the question we said we would pose when the Chancellor sat down was 'is the UK now a better place for manufacturers to invest and grow their businesses?' 

The answer is a modest yes with further positive signs on the horizon. But the Budget cannot be an excuse for any let-up from the coalition in dismantling the barriers to growth. We will hold the government to account on its Plan for Growth and expect progress to be consistent and considerable in future years.

Today the Department for Business is bringing together a large delegation of businesses and representative bodies, including EEF, to discuss what actions the government needs to take to support growth in manufacturing.  This is a key strand of the government's new approach to developing its policy agenda for growth over the course of this parliament. 

This is no small task - the challenge for government is to develop and implement a strategy for better balanced growth that not only steers our economy through the near term challenges, but also prepares the ground for sustainable growth in the long run.  With government relying more heavily than ever on the private sector to deliver growth, it needs to think more like the private sector as it puts together its policy agenda for growth. 

So if business were running the growth review how might it approach the task?

1. Leading from the front.  Firstly the CEO would take ownership, show leadership and ensure all his top team were pulling in the same direction.  The CEO would instil a culture change with all parts of the business focused on the growth objectives and their role in achieving it. 
   
2. Long-term vision.  The starting point is a clear sense of direction; a vision that sets out the company's ambitions for the next five years and good understanding of what the company is trying to achieve and clearly identified growth opportunities.
   
3. Invest.  Clearly defined growth objectives will drive investment in the parts of the business that can capitalise on those opportunities and drive growth.  Inevitably, this will go hand in hand with decisions on where to reduce costs and refocus efforts.
   
4. Engage the supply chain.  Recognising that supply chains are only as strong as their weakest link, business will communicates strategy and opportunities through the supply chain.  Success will depend on the supply chain investing and innovating alongside.
   
5. Never be satisfied.  Business recognise that there is no such thing as sustainable competitive advantage - achieving the vision requires continual evaluation of decisions - both the company's and what competitors and customers are doing. 

So, against the approach the private sector might take the government's record to date is encouraging.  It is thinking differently with cabinet-level engagement in the review.   There are also the makings of a shared objective in achieving economic growth that is more balanced across the country and between industries - although there hasn't always been consistency about what this will look like in practice. 

The initial engagement that is taking place today is also a good start, but this will need to be maintained if the private sector - those companies that will be central to driving growth - have the confidence to invest and grow.  But finally, government needs to cement this process - make it part of the government's DNA, not just in this parliament, but beyond. 

It took the Chancellor just over an hour to outline £80 billion of public spending cuts.  There doesn't appear to be much deviation from the approach the coalition set out at the time of the emergency budget in June - a bold and early start to deficit reduction with spending cuts doing most of the heavy lifting.  This was an approach we supported, but as we got nearer the announcement there has inevitably been growing concern about what would be cut and how.

What we were looking for was a commitment to continue investing in our long-term economic potential including in skills, innovation, low carbon technologies and export support.  Essentially the areas where government can play a role in the process of rebalancing the economy.

In 62 minutes the Chancellor outlined the details covering the three broad themes of reform, fairness and growth.  Our focus was on what the Chancellor had to say about growth.  At a high-level at least, there were quite a few reasons to be relieved; there were commitments to UKTI, to freeze the science budget, apprenticeships (albeit at the expense of Train to Gain funding), investment in manufacturing facilities at port sites, funding for commercial carbon, capture and storage and a bit more cash for the regional growth fund.

But...and there is always a but with these sorts of announcements, there is inevitably a lot of detail that will sit behind these decisions which will filter out in the coming days and weeks.  And with a strong private sector recovery vital for the economy the next step will be for government to pull together its spending decisions and reform plans and articulate its plan and what it's overall role is in supporting growth.

However, that wasn't the biggest But.  Within the 'reform' package of measures ,HM Treasury announced the simplification of the Carbon Reduction Commitment (CRC) .. and by simplification they meant that the revenue raised would no longer be recycled back to businesses that had improved their energy efficiency.  This amounts to old-school Treasury sleight of hand; a retrospective decision that will impact on businesses that have already invested in improving their processes and efficiency.  Not quite in the spirit of a more collaborative approach to tax making and surely a move that should be considered alongside a review of the Climate Change Levy.