This morning the Bank of England published its quarterly Trends in Lending report, the central bank's latest assessment of the flow of credit around the UK economy, covering the final months of 2013.
The provision of external finance remains a key issue for policymakers. Our own surveys of credit conditions across manufacturing over the past year have offered some tentative encouragement, indicating that the availability (if not always the cost) of credit has been gradually improving, alongside strengthening loan demand from businesses. The Bank of England's latest findings would seem to support this view, although it is also evident in the continuing weakness of the actual stock of lending data that significant obstacles remain, particularly for SMEs.
Availability of credit
- According to the central bank, the overall availability of credit to the corporate sector increased significantly in Q4 2013.
- Availability increased for large companies and for small businesses, while it was little changed for medium-sized companies. However, the report stressed that credit availability on average was still tighter for small firms than before the 2008-09 downturn, particularly for those lacking secure collateral.
- Lenders expected overall credit availability to increase further over the next three months.
- Demand for credit from small businesses was little changed in Q4. In contrast, there was a significant rise in demand from medium-sized companies.
Cost of new finance
- The broad message from various surveys/economic agents was that the cost of new finance for small businesses was largely unchanged in the three months to November 2013 compared with the previous three-month period.
- In contrast, spreads on new lending for medium-sized and large firms fell sharply, as did related fees and commissions.
- Respondents expected the cost of new business lending in Q1 2014 to decline significantly further for large companies, to fall slightly for medium-sized companies, and to be unchanged for small businesses.
Stock of lending
- The overall stock of lending to UK businesses fell in November 2013, both on a monthly basis and when compared with the year-earlier period.
- This maintains the declining trend in lending to corporates that has continued unchecked since 2009.
- Gross lending to SMES and to large companies did both increase by around 10% in the 12 months to November 2013.
- However, debt repayments were higher than gross lending over this period, so that the stock of net lending to UK businesses continued to fall, declining by £4.3bn in the three months to November.
Still more to do
Bank lending to UK companies, and particularly to SMEs, has continued to disappoint ever since the global financial crisis erupted in 2007-08. Throughout this period weakened bank balance sheets and increased risk aversion have significantly constrained the supply of credit in the economy--a key factor behind the UK's poor growth and productivity performance of recent years.
There was a welcome upturn in broader economic sentiment and activity during the course of 2013, which can certainly be attributed in part to improving credit availability as the impact of the Funding for Lending Scheme (FLS) sharply reduced lenders' funding costs. So far, however, this has translated primarily into rising mortgage lending and better access to external finance for large companies. The latest data from the Bank of England show that growth in the overall stock of net lending to the corporate sector as a whole remains very weak, while many SMEs are still constrained by the cost of credit and by a degree of reluctance to seek new lending. Without a meaningful turnaround in demand for credit (and thus business investment) a self-sustaining recovery of the UK economy beyond next year's general election may prove elusive.