News of modest improvements in the availability of credit in the economy were accompanied yesterday by warnings from Bank of England policymakers about the fragility of the recovery, and the success of the Bank's policy of quantitative easing.
David Miles, a recent appointment to the Bank's Monetary Policy Committee and a former adviser to the Government on housing, told the Treasury Select Committee that any economic growth was likely to be "anaemic" and that the banks were on "life support".
"It may be the case that we get what looks like a very sharp rebound over the next few quarters: one might interpret that as a V-shape, but that doesn't really tell you an awful lot about what the likely path of GDP growth will be... The prospect of a rapid return to growth doesn't seem a highly probable outcome. But there are reasons for thinking the period of the most rapid declines in output is behind us," he said. "My hunch – and I put it no stronger than that – is that we have seen most of the overall aggregate house price falls."
A week before the MPC meets again to review interest rates and quantitative easing, fellow committee member Tim Besley also cautioned that the policy would need more time to be seen to work. "We will not know for sure whether quantitative easing has been directly effective in supporting nominal demand growth for some time, and a definitive assessment right now would certainly be premature," he said. Such comments suggest that a reversal, the "exit strategy", is distant.
Some £100bn of a current "budget" of £125bn has been spent. A further £25bn is available from the initial allocation from the Chancellor of £150bn, agreed in March. Some economists are now predicting that the Bank will ask Alistair Darling for an extension to the scheme in August, to coincide with the Bank's Inflation Report, or even next week. The European Central Bank left rates on hold, at 1 per cent, yesterday.
Vicky Redwood of Capital Economics commented: "The large amount of quantitative easing already undertaken could ensure that the recovery will be strong enough to bring inflation back to target. So far, however, it still seems to be having limited success. Bank lending, in particular, is still disappointingly weak given that commercial banks' reserves with the Bank of England have now broadly tripled."
The Bank's latest quarterly Credit Conditions Survey states that there has been a "small increase" in the availability of lending in the three months to June, though unsecured credit has declined. Credit availability to households and companies is expected to improve over the next few months. Weak demand for credit is thought to be more of the problem now.
However, there was relatively little to cheer first-time buyers, with small deposits and mediocre credit ratings. The Bank says that loan-to-value (LTV) ratios had remained "broadly unchanged" over the quarter, though lenders were now tightening up their credit-scoring criteria in readiness for increased lending to high LTV borrowers over the next three months". Meanwhile, the Chartered Institute of Personnel and Development reported a continuing high level of redundancies: there were 300,000 in the first quarter.
Green shoots wither: Construction slips back
The contraction of Britain's building sector accelerated again last month, and construction orders over the three months to May also dropped, adding weight to fears that the UK faces a "double dip" return to recession.
The construction purchasing managers' index, a leading indicator of economy activity, had showed a brief lift in May. But the Chartered Institute of Purchasing and Supply (Cips) said yesterday that its index had dropped back by more than a point to 44.5 in June, still well below the break-even "50" mark.
Alongside wavering confidence in the future, historical data is also gloomier than expected. Office of National Statistics (ONS) numbers for the three months to May, also published yesterday, show construction industry orders falling by 1 per cent compared with the previous three months, and 30 per cent year on year.
A brief flurry of "green shoots" last month raised hopes of an early recovery from recession. Figures from the NIESR showed that the economy returned to growth in April and May, and rising manufacturing output appeared to corroborate the view that the worst was over. But with banks still reluctant to lend, and concerns over public debt rising, the economy is in danger of slipping back, analysts warn.
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