More dire figures hit Britain's hopes for recovery

Raft of bad news sees mortgages slump and credit squeeze on small businesses

Britain's recovery hopes were undermined by more dire economic news yesterday as shoppers tightened belts, mortgage lending slumped and more signs of the credit squeeze on small businesses emerged.

The raft of downbeat figures follow shock estimates from the Office for National Statistics (ONS) showing a dramatic deepening of the UK's recession between April and June – dampening hopes for a strong bounce-back in the current quarter as the eurozone crisis rumbles on.

The high street endured difficult trading during the first half of July as the unprecedented wet weather continued to drive away shoppers, according to the CBI's latest distributive trade survey. Sales are still growing, but at a far slower pace than expected and there is little expectation of an uplift soon.

Judith McKenna, who chairs the CBI's distributive trades panel, said: "Retailers also expect conditions to remain tough during August. With consumer confidence weak and wage growth remaining sluggish, the longer-term outlook remains challenging."

The Bank of England's latest figures also revealed a sharp drop in mortgage lending during June as approvals for new home loans dropped by 12 per cent to an 18-month low of 44,192. While the weather and the extra day's bank holiday for the Diamond Jubilee celebration is likely to have had an impact on the market, experts said rising funding costs for lenders were also putting up the cost of loans.

The average interest rate of a new mortgage rose over the month to 3.82 per cent – the highest cost for a year – according to its detailed figures.

The Bank's data also showed cautious borrowers actually repaying £355m in mortgage debt over the month, the largest amount since December 2010.

The figures also revealed firms paying on average 3.27 per cent above the Bank's 0.5 per cent base rate in June, twice as expensive as the rate paid on average in the three years before the credit crunch.

Larger firms, in contrast, paid on average a 1.63 per cent premium above official rates in June for loans worth more than £20m, still in sight of the pre-crisis average of 1.21 per cent. The Treasury launches its new £80bn Funding for Lending scheme on Wednesday in an attempt to improve the flow of credit to small businesses.

The slew of figures come as the Bank of England prepares to meet for the first time following the ONS's dramatic verdict of a 0.7 per cent slide for the UK in the second quarter.

Threadneedle Street injected £50bn into the economy via quantitative easing last month and is set to hold fire on more action this Thursday. But the European Central Bank is likely to step in with measures to prop up bond markets in Spain and Italy to ward off fresh turmoil in the single currency bloc.

Capital Economics' economist Samuel Tombs said: "Given our view that the eurozone crisis is likely to intensify, thereby weakening UK banks, we continue to expect weak money and credit growth to undermine the pace of the economic recovery for some time to come."