Slowdown in lending threatens new squeeze on companies

Viable firms could be forced out of business if credit drought intensifies

Lending to companies slowed sharply in December, highlighting the threat of a worsening credit squeeze on businesses that would increase the impact of the recession.

Bank of England figures yesterday showed lending growth to private non-financial companies at 3.7 per cent, down sharply from 4.9 per cent a month earlier and 8.5 per cent in September.

The figures do not show whether the drop was due to reduced demand or availability of credit, though both are likely to play their part as banks remain wary of lending while businesses cut investment as the economy shrinks.

Alan Clarke, UK economist at BNP Paribas, said: "I'm surprised it [credit to companies] is still growing at above the trend pace of the economy. The outlook is still getting worse and worse and if that is what is controlling the availability of credit to firms there is more down before we go up again."

The Bank and the Treasury are working to prevent a credit drought that could see otherwise sound businesses go to the wall because of lack of finance. The Bank will spell out plans next week to buy up corporate debt to increase the availability of credit and bring down the price companies pay to borrow.

In a further sign of the strain on Britain's companies, a CBI survey released today shows that small and medium-sized manufacturers are cutting jobs at the fastest rate since the early 1990s as demand for UK-made goods drops.

In the three months to January, employment, new orders and output among manufacturing small and medium-sized enterprises (SMEs) fell at a rate not seen since the last recession, and firms are braced for the next quarter to be tougher.

Russel Griggs, the chairman of the CBI's SME council, said: "This survey closed before the Government's measures to kick-start lending across the economy were announced and we hope these will soon begin to make it easier for firms struggling to access the credit they need to go about their day-to-day business."

There was also bad news from consumers as confidence fell close to a record low and lending to individuals slowed. The recent spate of big job losses increased consumers' gloom, especially among the under-30s, taking sentiment close to the level struck in July, which was the lowest since the Gfk NOP survey began in 1974.

Bank of England figures showed that loans secured on dwellings grew by 5.7 per cent in December, down from 6 per cent in November. Credit card loans dropped 0.1 per cent during the month, the first time customers had paid back debts since the middle of 2007.

The economy needs Britain's already heavily indebted consumers to keep spending despite the grim outlook for employment and incomes. Andrew Goodwin, the senior economic adviser to the Ernst & Young Item Club, said: "December is an important month for consumer spending and these weak consumer credit figures provide further evidence that a significant consumer retrenchment is under way."

Mortgage approvals rose to 31,000 from 27,000 a month earlier, surprising economists and registering their biggest rise since before the credit crunch. But the level of approvals remained close to historic lows and the increase is unlikely to prevent a further sharp fall in house prices this year.

Charles Davis, an economist at the Centre for Economics and Business Research, said: "It is the collapse in lending to households and businesses that underpins the sharpest contraction in economic activity since 1980."

The Bank's Monetary Policy Committee (MPC) meets on Thursday to decide interest rates. The MPC is widely expected to cut the cost of borrowing by another half point to a new all-time low after a barrage of grim economic news. The International Monetary Fund predicted last week that Britain would be the worst-affected developed nation by the global recession.