Despite attempts by the Government and the Bank of England to encourage the banks to lend to the "real economy", the supply of credit to businesses is still shrinking, while the supply of mortgages is only crawling ahead.
The Bank of England data, released yesterday, showed that loans to non-financial companies fell by £7.7bn in June, or about 6.4 per cent a year. Lending to manufacturing decreased by £2.4bn. Although volatile, the figures do not present an encouraging picture of a banking sector returning rapidly to normal patterns of lending, and are the worst since the extraordinary £14bn contraction witnessed last July. Unlike last year, the decline in lending by banks is not being offset by an increase in capital issuance in the form of bonds and commercial paper by private firms. These too fell by £3.9bn, the weakest in two years.
Mortgage lending is also running well below pre-crisis levels, and is again helping depress house prices.
The Nationwide Building Society reported a 0.5 per cent drop in average house price values in July. It was worse than expected, and takes the quarter-on-quarter annualised rate of decline in this series to -5.5 per cent.
Many economists believe that house prices will end 2010 lower than they started; the long-term restriction on new loans, as the banks repair balance sheets and contain fresh lending to only the best risks, will also dampen any hopes for a property revival. The cost of borrowing is edging higher: the effective interest rate on new mortgage business moved up by 9 basis points to 3.94 per cent in June, its highest since December.
The National Institute of Economic and Social Research said earlier this week that, in real terms, real estate values would be lower in 2015 than today.
Mortgage approvals fell to their lowest since January, at 47,600, down from 49,461 in May and net lending was just £665m, all below the levels needed to underpin a healthy market.
Hetal Mehta, the senior economic adviser to the Ernst & Young Item Club, said: "Today's figures provide further evidence that the housing market is set to dip over the coming months.
"High unemployment and the impending fiscal squeeze give reason for consumers to remain cautious. With confidence so fragile, housing market activity is likely to recede."
As the Bank of England looks forward to its next Monetary Policy Committee meeting next week, the soft borrowing figures will strengthen the hand of those on the committee arguing for no change. In his evidence to the Treasury Select Committee on Wednesday, Mervyn King, the Governor, said that there is "some considerable distance to travel" before rates could return to normal and that the MPC had its "foot firmly on the monetary accelerator".
The Bank faces unusually sharp dilemmas about policy, as inflation will stay above the 2 per cent target for "much of next year", according to Mr King. They are made the more pressing because the Government has placed the main responsibility for securing the recovery on the MPC. In an interview with Reuters, George Osborne, the Chancellor, said: "I have always believed that the greatest stimulating effect you can have in the economy is a monetary one not a fiscal one and the way to keep rates for longer... is by making sure fiscal policy is supporting and in this case means dealing with the budget deficit."
The implication is that, should the economy enter the so-called "double dip", it would be up to the Bank to boost the economy, not Mr Osborne.
But the latest lending data highlight how difficult it may be to persuade people and businesses to borrow and invest when confidence is fragile – in Keynes's famous phrase, the Bank may be "pushing on a string". Indeed, the latest survey of consumer confidence, by GfK/NOP shows it falling for a fifth month running to hit its lowest this year.Reuse content