Despite some more positive economic indicators, credit conditions still show "no signs of easing" and companies are frightened of their lenders, according to the Bank of England (BoE) agents charged with assessing the business environment.
Their monthly summary of fact-finding missions from across the UK, published yesterday, paints a dismal picture, with falling export volumes absorbing any gains from sterling's depreciation, destocking continuing apace, and output still contracting.
But the freeze in the banking system remains a problem. "Credit conditions had continued to be a major concern for many firms, with no signs of easing in recent months," the agents' report says. "Some firms remained wary of approaching banks for finance for fear of triggering changes in the terms attached to their existing borrowing."
The gloom is echoed by last month's meeting of the BoE Monetary Policy Committee (MPC), the minutes of which were also published yesterday. Although the MPC noted positive developments in equity prices, interbank lending, purchasing activities and housing market activities, there is little conviction that green shoots will reach maturity. "Overall, the risks to the domestic economy remained weighted to the downside," the minutes said.
The MPC voted unanimously in favour of holding the 0.5 per cent interest rate and of pursuing existing plans for quantitative easing (QE) to boost liquidity, of which £26.5bn-worth of the £75bn total have been made. But despite signs that credit availability may be starting to improve, it is too soon to be sure that the improvements will continue. The MPC also noted the potential for "significant further retrenchment" in consumer spending and, with regards to much-needed additional lending, there remains "a risk that this extra supply of credit would not materialise".
While QE does seem to have helped to improve the functioning of corporate markets – with gilt yields falling on the announcement of the programme – there is still no certainty that the plan will work, the minutes said.