Bank borrowing patterns reflect UK's fragile economic confidence

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The Independent Online

Bank lending to business continued to slide last month, although the number of mortgage approvals improved to the highest level so far this year, the British Bankers' Association (BBA) said yesterday.

The industry group blames sluggish demand for the £1.3bn drop in loans to private non-financial companies in May, which was a sharper fall than in April while a slight improvement on the six-monthly average drop of a £1.6bn. But the report will fuel concerns that lack of access to credit is putting a drag on economic recovery.

Meanwhile, a third consecutive monthly rise saw mortgage approvals boosted by 980 to 36,709. But approvals were still way below both last December's 27-month high and the monthly average since 1997. And although net mortgage lending picked up to £2.6bn after April's nine-year low of £1.8bn, the annual growth rate remained flat at 4.3 per cent, a far cry from the eye-watering 8 per cent in 2008.

Experts warn that the housing market is still unpredictable, even more so thanks to the emergency Budget from the Chancellor this week.

"The mortgage market is flatlining," Brian Murphy, at the Mortgage Advice Bureau, said. "Although we expect activity to rise slightly in the months ahead, any major change is likely to come further down the line, triggered by an external factor such as subdued consumer spending and confidence following the VAT hike in January, an interest rate rise or public spending cuts later in the year."

Concerns about the future of the housing market are heightened by the recent shift in the balance between supply and demand. The house price recovery since the doldrums of early last year hinges to a large extent on a shortage of supply. But the number of houses for sale is rising fast – booming by as much as 22 per cent this month, the property website Rightmove said this week – putting downwards pressure on prices.

Consumers are also still spooked by the patchy economic conditions and looming public spending cuts. The BBA report shows some £5.9bn of credit card debt was repaid in May, while "only" £5.6bn was borrowed, as wary consumers pay down their debts.

Howard Archer, the chief European economist at IHS Global Insight, said: "The further net repayment in consumer credit in May is clearly the consequence of an ongoing desire of many consumers to reduce their debt in the face of a still very uncertain and somewhat troubling economic environment and the looming major fiscal squeeze."

Low consumer appetite for new debt, and limited consumer credit availability from banks, are also factors. And the Chancellor's austerity Budget just adds even greater pressure on household finances.

"Serious concerns and uncertainties over jobs and the economic outlook are causing a substantial number of people to want to save more," Mr Archer said. "Indeed, the grizzly Budget may well heighten consumers' concern about the economic outlook and jobs and increase their desire to improve their personal finances."

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