Budget deficit defies worst fears but GDP signals mixed

Ahead of today's vital data on economic growth in the first quarter of the year, which will once again focus political attention on the economy, mixed signals emerged yesterday on bank lending, the public finances and business confidence.

Economists say that there is massive uncertainty surrounding this morning's preliminary GDP release, due to the serious hit to economic activity in January coming from the arctic weather conditions and the Office for National Statistics' patchy recent record for accuracy.

However, encouraging news on the budget deficit, the centre of much election debate, was released by the ONS yesterday, which showed that borrowing in the past financial year was about £3bn less than the Government's forecast in last month's Budget.

Public sector net borrowing totalled £163.4bn in 2009-10, some £3.1bn lower than the £166.5bn forecast by the Chancellor – but much higher than the £96.5bn shortfall in 2008-09. It is also the largest figure for annual borrowing since the Second World War. At 11.6 per cent of GDP it is not far removed from that of crisis-stricken Greece, proportionally.

The total of public sector net debt, colloquially termed the national debt, stands at £771.6bn, equivalent to 53.8 per cent of GDP. Including the cost associated with rescuing the banks, that figure rises to £890.0bn, or 62 per cent of national income.

Tax revenues – bloated during the boom by the City and the housing bubble – have been extremely weak during the recession.

This year there has been a 19.5 per cent fall in corporation tax and petroleum revenue tax receipts; an 8.4 per cent fall in income tax and capital gains tax receipts; a 4.1 per cent fall in VAT receipts; and a more modest 1 per cent fall in national insurance contributions. But government revenues did rise in the first quarter of this year compared with the last months of 2009, the first quarterly rise in two years.

Depressed lending to businesses is also showing signs that it may turn positive before too long, according to the Bank of England. In its latest Trends in Lending report, the Bank said that, while the flow of net lending to UK firms remained negative in February, it was down less than in January – an £800m drop against £6.9bn.

As has been the case for a long time, the Bank reported that credit availability was easing, though by less for smaller businesses than their larger counterparts: "In recent discussions, the major UK lenders expected corporate credit demand to remain subdued in coming months." Net mortgage lending was "little changed" in February, said the Bank; total net consumer credit flows turned positive, though remained very low.

The trends in lending were reflected in the Bank's latest numbers on money supply growth, despite the quantitative easing programme which has injected £200bn into the economy since last year. Headline M4 growth increased by just 0.1 per cent in March, leaving the annual growth rate down to 3.5 per cent – the weakest reading since February 2000 and a couple of percentage points below where the Bank would probably like to see it to be consistent with the 2 per cent inflation target.

One sector that does seem set to support the economy is exports, says the CBI. Its Industrial Trends survey reveals a remarkable rise in the net balance of business optimism, from +12 to +24, the highest reading since 1994 – underpinned by further increases in exports. The CBI's figures are consistent with annual industrial growth of about 4 per cent.

Jonathan Loynes, at Capital Economics, said: "Of course, this recovery comes from an extremely weak starting point – it will take a long time for activity in the manufacturing sector to recover to pre-recession levels, if it ever does. And rising costs present a threat to producers' profit margins. Still, for now at least, a reasonably solid industry recovery seems to be under way. But that can't drive a strong pick-up in the overall economy on its own."

The big numbers

£163bn Public sector net borrowing for the year; £3.1bn less than forecast in the Budget but higher than last year's £96.5bn

£771bn National debt – equivalent to 54 per cent of GDP. Including the banks' bailout, the public sector net debt rises to £890bn