Agents' summary points to weak demand, tough credit conditions

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This week the Bank of England released its Agents' summary of business conditions for August. This is a report based on the Bank's network of agents around the UK who go out and talk to businesses in their area to add to the Bank's intelligence about what's happening in the real economy.

Given ongoing weakness in the eurozone and recent disappointing economic data (GDP for q2 in particular), it's perhaps not surprising that the summary paints a picture of some gloom with demand weakening both at home and abroad.

A couple of interesting points I took out of this month's edition:

Credit conditions

Credit conditions remain polarised between, basically, large firms or firms that don't really need any cash and smaller firms that lack track records, security - or who banks really don't want to lend to as they continue to seek to shrink their balance sheets.

It will be interesting to see what the next SME Finance Monitor says next month about credit conditions for SMEs. While we can't do anything about firms not wanting to borrow given the weak demand outlook, it's worrying that (as the agents' summary notes) some creditworthy firms are still put off approaching their banks for finance.

I think cost is part of the picture, so the latest incarnation of 'credit easing' - Funding for Lending - will hopefully stir companies to approach their banks again to support their investment. But a lower cost has only got a chance of influencing firm behaviour if firms are still engaged with finance providers - I fear many no longer are following bad experiences in recent years.

Capacity utilisation

Despite firms reporting a moderation in export growth, exporting firms are still reporting that they are operating at close to full capacity. This is a story backed up sectorally, for example in the automotive sector, where capacity constraints for some major firms with high export concentration (85%) are being reached. But persistent weakness in Europe and fears that this weakness may be spreading to other markets, including strong-growing emerging markets, may test this strength in the second half of the year.

The flipside of this export story is what's happening domestically where firms that are focused on domestic markets report a degree of slack in capacity. Ironically, domestic demand has potentially a better story in the near future than export demand. While there's no suggestion consumption is about to surge, the drift down in inflation (despite last month's tick-up) should start to relieve the pressure on real incomes endured for several years by domestic consumers.

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