Outlook For anyone whose mood has been lifted by all the encouraging talk of green shoots in recent weeks, the latest slew of data yesterday will have provided something of a rude awakening. A relapse in the retail sales figures, a decline in mortgage lending, faltering industrial production and some truly awful data on public finances: not much evidence of a return to economic health in that lot.
Of all the dismal data, the Bank of England's latest report on trends in lending makes the most depressing reading, because it is from the state of credit conditions that so much else springs, good or bad.
To some extent, particularly in the area of lending to business, the reductions in loans recorded by the Bank reflect lower demand. In this economic environment, businesses are less inclined to embark on costly investment programmes, preferring instead to pay down debt. There is also some evidence that companies are arranging shorter-term borrowing facilities than in the past, because longer-term debt remains so expensive, which will also have depressed the figures.
More worrying, however, is the warning from the Bank that the supply of credit is not improving, because that suggests the enormous efforts made through policies such as quantitative easing are not yet bearing fruit. The CBI warns that the supply of credit has continued to deteriorate over the past month, albeit at a slower rate, while the Bank's own agents report only sporadic improvements in the willingness of lenders to extend borrowing facilities.
Nor are official lending figures to be entirely trusted. We know the banking industry is under intense political pressure not to compound the problems of recession by withdrawing credit from otherwise healthy businesses. And now there is some anecdotal evidence of banks responding to this pressure by extending lending facilities to companies they know have no intention of drawing down the debt – thus improving their credit supply figures artificially.
The view from the mortgage market is no more reassuring. There has been only a tiny increase in the number of home loans available at anything other than the lowest loan-to-value ratios. And the Bank warns that the valuation process, with many banks taking longer than usual to value properties, is compounding borrowers' difficulties.
Another potential headache is the sharp increase in the cost of fixed-rate mortgages we are beginning to see, with several lenders raising the cost of borrowing in the past week alone. Bank base rates may remain at historic lows, but the rising cost of mortgage funding is being passed on to customers – in some cases with some additional profit margin thrown in.
Just to complete the picture on lending, the Bank reports that consumer credit also remains weak. No respite for the retailers there then, which is another reason why yesterday's return to negative territory on sales should not have been a surprise.
To put all this together, we have thrown the kitchen sink at lending, through unprecedented interest rate cuts and unconventional monetary policies, yet the resulting improvement in the credit environment has been modest at best. And in that world, all those green shoots we have clung to hopefully over the past don't have much chance of becoming fully established.Reuse content