Bank lending to UK businesses will go up this year for the first time in four years as economic growth picks up, according to an influential forecasting group, in a boost to government attempts to kickstart a flatlining economy.
The prediction comes after the Treasury and Bank of England extended the £80bn Funding for Lending scheme in an attempt to boost support for small businesses, which are still struggling to borrow.
Lending is expected to grow by 3% to £440bn this year, and by 8.5% to £447bn in 2014, according to a report published on Monday by independent forecaster the Ernst & Young ITEM Club. The news is a further boost to George Osborne after the chancellor escaped the ignominy of a triple-dip recession last week with the publication of official figures that showed GDP growth of 0.3% in the first quarter of 2013.
The flow of money towards British business in the ITEM report would be a dramatic reversal of last year’s crackdown on credit, which saw lending to corporates shrink 5%, hitting the lowest level since 2006.
“You might be forgiven for thinking we were still in the midst of the banking crisis,” said Andy Baldwin, head of financial services in Europe at Ernst & Young. “But behind the scenes banking fundamentals have quietly been improving and banks are now in a better position to be able to provide funds to the wider economy.” Nonetheless the optimism of the ITEM forecast is at variance with some of the Bank of England’s own soundings, which show that small firms are still faced with a tough lending environment.
The main drivers of banks’ return to lending would be better access to wholesale funding and a decrease in bad loans, Baldwin said, rather than any marked impact from Funding for Lending, which was launched by the Bank of England last year but has failed to have a marked impact on business lending.
A fall in money lost to bad loans is also helping to rebuild confidence. Write-offs are forecast to fall to £9.3bn, just 0.56% of all borrowing this year, after peaking in 2013 at £11.6bn.
However, even minor changes to the UK interest base rate could push many companies into bankruptcy, the report’s authors warn. The Bank of England has held rates at a record low of 0.5% for four years, helping businesses and home owners stay solvent.
Banks have been more lenient than in previous recessions, allowing weaker loans to continue rather than foreclosing. Many companies being kept afloat are simply able to service their debts and are unable to invest or expand.
“It wouldn’t take a significant shift in interest rates to increase the repayment burden of families and businesses across the UK, at great social cost and with a detrimental knock on effect on lending,” said Baldwin.
ITEM is the only non-governmental forecaster to use the Treasury’s model of the UK economy. It also consults a network of company executives, from a range of corporate life including FTSE companies and small-sized firms. According to ITEM, economic growth will be modest, with the UK economy growing 0.9% in 2014.
The Bank of England, which administers the Funding for Lending scheme, will be extending it for a year until January 2015, and it will offer lower interest rates to lenders who can prove they are extending credit to small businesses.
The senior economic adviser to the ITEM Club, Carl Astorri, said the upbeat outlook reflected the fact that company executives are coming to terms with an uncertain business environment, where the implosion of the eurozone and the Chinese economy is a constant but so far unrealised threat.
“Things like the eurozone collapse, the Chinese hard landing or sequestration in the US have been prevalent when we speak to top chief executives and chief financial officers. But increasingly they are less fearful and are becoming used to operating in an environment where those risks exist.”
The ITEM Club’s optimism comes despite a more cautious assessment of the business lending environment from the Bank of England. In its agents’ report for April, which gauges the economic environment around the UK, the bank says firms are “relatively positive” about their likely use of bank borrowing over the next 12 months.
In a survey of 370 firms, the bank said large companies had seen an improvement in availability of credit but small firms, classified as businesses with a turnover below £1m, had seen a deterioration in the availability and cost of loans. Medium-sized companies said access to borrowing was easier, but more expensive.
