UK recovery threatened by lack of credit, says EEF

Britain's economic recovery is still being threatened by the lack of credit on offer from banks, a leading manufacturers' organisation reports today, warning that many businesses are actually finding it harder to secure affordable finance than a few months ago.

A survey conducted by the EEF said 47 per cent of firms had seen the cost of finance increase over the past two months, from 44 per cent in the second quarter and 37 per cent in the first. Only 7 per cent of manufacturers said the cost of finance was now falling.

Manufacturers also found the cost of new borrowing was still rising, with banks charging both higher fees and more expensive interest rates.

A third of companies added that the supply of credit had shrunk in recent weeks, though this was an improvement from the second quarter when 42 per cent of businesses warned lines of credit were dwindling. However, small firms, in particular, are being hit by the credit shortage, the EEF said.

Steve Radley, the EEF's director of policy, said that despite action from policymakers, the manufacturing sector's hopes of recovery were being hampered by their credit difficulties. "Despite historically low levels of interest rates and significant intervention by the Government and the Bank of England, credit conditions remain very tight for most manufacturers," he said.

"Given the severe damage done to banks' balance sheets by the recession, this is likely to remain the case for some time and will dampen the recovery as meeting new orders puts increasing pressure on manufacturers' cashflow."

The EEF's warning reflects increasing concern that the inability of banks to lend more to business might prevent the UK from exiting recession or, at the very least, act as a cap on the strength of the recovery.