Merlin sails on but BoE report shows cause for ongoing concern

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This week has seen the major UK banks jump the gun on the Bank of England and effectively release the results of their lending to businesses against the ‘Project Merlin' targets agreed with the government.

We've always said the Merlin agreement is positive insofar as it shows intent from the banks to get lending flowing. And the fact the banks are following through on their commitment by staying on track with their targets (although slightly under for SMEs) is encouraging.

But let's not kid ourselves that this is the final answer.

Look at what the Bank of England's July Trends in Lending report is saying:

  • Lending to businesses contracted in the three months to May;
  • Spreads (the cost on lending relative to a reference rate) are still worsening for smaller firms – even as they narrow for medium and larger firms (who tend to have other options anyway);
  • Interest rates are drifting up for the smallest firms (turnover under £1 million)
  • And the Bank of England's Credit Conditions Survey for 2011q2 shows strong demand for finance from SMEs despite banks saying the opposite is true.

So as we look at a disappointing quarter 2 for the economy in general, and UK manufacturing in particular, is access to finance still a problem? Yes

Investment isn't happening and while a lack of confidence in the outlook for demand surely takes the lion's share of blame, access to finance is also part of that picture.

Crucially it's a part that can be influenced.

Well intentioned as it might be, Merlin will not be the complete answer. We need to see more debate about additional action that might be needed to get finance and investment moving again.

Both the banks and the government have a responsibility to stimulate this debate.

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