Small firms suffer deeper cuts in loans but mortgage market is up

In a setback to hopes of an economic rebalancing for the UK, latest figures from the Bank of England yesterday showed a strong rise in lending to homebuyers in May was offset by continued decline in the amount of credit extended to small businesses.

The Bank said the number of house purchase approvals was 58,242 in May, the highest level since December 2009. City analysts attributed this to the Bank's Funding for Lending scheme (FLS) and the Government's Help to Buy programme. There was also a rise in credit card lending in May. But the figures also showed bank lending to small and medium-sized firms contracted by £452,000 during the month, despite the FLS incentives .

"At best it appears that FLS may have stopped lending to businesses from falling more than it has," said Howard Archer of IHS Global Insight. Lending to the wider corporate sector fell £1.3bn in May, continuing a trend of negative net lending to businesses since the 2008-09 financial crisis.

The Coalition took office planning to shift the economy away from reliance on consumption and housing for growth, and towards exports and investment. But both have disappointed over the past three years, despite a 20 per cent depreciation in sterling, and the Chancellor has pinned his hopes for recovery on rising house prices.

There was better news as the manufacturing sector survey for June from Markit/Cips showed an increase in activity for the third successive month. The index ticked up from 51.5 to 52.5, with any reading above 50 pointing to expansion.

Bob Jenkins, a former member of the Bank's Financial Policy Committee, yesterday attacked Barclays for saying it might withdraw lending if required by regulators to lower its leverageand asked if this was "plain stupidity?"