British companies delivered a vote of confidence in prospects for the economy by increasing their bank borrowing during the first three months of this year. The return to borrowing by industrial and commercial companies signals some combination of higher investment, bigger dividends and more takeover activity in coming months.
Companies as a whole paid back bank loans, as part of the process of restoring their balance sheets to health, between early 1992 and the end of last year. The ratio of current assets to borrowings for big non-financial companies fell to 123 per cent in the first quarter, from a peak of 148 per cent in mid-1994, according to official statistics released yesterday.
The rise in bank borrowing - which was still strong even when adjusted for the financing of the Wellcome-Glaxo deal - confirms hints from earlier bank statistics that companies are happy with the state of their balance sheets for the first time since the explosion of borrowing in 1989-90. The company sector's financial surplus was a record pounds 13bn last year, compared with a pounds 23bn deficit in 1990.
Kevin Darlington, UK economist at Hoare Govett, said: "The desperation borrowing during the recession has been unwound. The latest decline in company liquidity is a sign of corporate confidence in the state of the economy."
The Treasury uses the corporate liquidity figures to help forecast future investment spending. In its Budget forecast it predicted that business investment would grow by 10.75 per cent this year, and even the most pessimistic outside forecasts expect a significant improvement on last year's 2.2 per cent rise.
Mr Darlington said: "This is a key reason why the economic slowdown is unlikely to turn into anything nastier."
Yesterday's figures suggested that borrowing, and hence investment spending, were concentrated in manufacturing industry. Of a pounds 1.5bn rise in bank borrowing in the first quarter, manufacturing companies accounted for pounds 1.4bn. The other uses for the new-found corporate largesse will be dividend payments and takeovers. Dividends paid by companies in the FT-SE all- share index grew 12 per cent last year. Their growth will be about as strong this year, according to many analysts.
Separate figures published yesterday showed net new bond issues announced by UK borrowers amounted to pounds 6.79bn in the three months to May. Actual net issues totalled pounds 2.88bn, with the biggest issue by Glaxo Wellcome for $500m.