The British economy showed a glimmer of improvement last week. The UK’s composite PMI index, a measure of business confidence as reported in surveys from large and small firms, rose from 51.1 in February to 51.4 in March. With readings above 50 indicating business leaders think their sector is growing, this looks a decent result.
The detailed figures show, though, that the UK is failing to “re-balance” away from fickle consumption to towards solid investment-led growth. The Manufacturing PMI index edged up from to 48.3 last month, this key sector continuing to contract. The Construction PMI sub-index was even more moribund, inching forward to just 47.2.
The Services PMI index climbed to 52.4, its third successive monthly rise. With overall GDP down 0.3pc during the last three months of 2012, the UK is in danger of tipping into “triple-dip” recession. These PMI numbers suggest such a confidence-sapping outcome will be avoided, with our service sector just about keeping GDP afloat when preliminary first quarter numbers are released later this month.
Even on the most upbeat assessment, though, the UK’s economic performance remains dire. Five years since this credit crunch began, we’re a long way from a meaningful recovery. After the recessions of both the early- and late-1970s, the UK economy was 3-4pc bigger on a nominal cumulative basis five years on. The same was true following the early-1990s recession.
Even after the Wall Street crash, British GDP had grown more than 4pc by this stage, recovering from the deep early-1930s slump. Five years on from this sub-prime collapse, though, and our cumulative nominal GDP remains more than 2pc below its pre-crisis peak. Britain is enduring its worst recovery in history. So let’s not get too excited that business-sponsored survey measures suggest we might, just, avoid triple-dip recession.
The debate about how the UK escapes from this economic torpor remains deeply entrenched, largely along party lines. Our politicians are locked in a “growth versus austerity” soap opera, trading ideological jibes as they argue over tax and spending plans that are anyway largely fiction. The truth is that, if the UK economy is to fire on all cylinders again, our banks badly need to raise fresh private sector capital, then extend finance to the creditworthy businesses that will generate sustainable recovery.
A little bit of extra government spending here, a new “scheme” there, while driving endless political spats, will have zero impact on growth compared to forcing a banking sector re-boot. Debates over tiny dabs of unaffordable state largesse amount to posturing and political parlour games. Such energy-sapping policy tweaks don’t affect our growth trajectory in the slightest, but are mere exercises in temporary media management.
Sorting out the opaque, wealth-destroying mess that is the UK banking system, in contrast, requires courage and a sustained determination to face down powerful vested interests. I wonder, after decades of relative prosperity, and the complacency that breeds, if the UK and much of the Western world has leaders who are willing and able to do this. I see much evidence to the contrary.
The Bank of England’s quarterly Credit Conditions Survey, published last week, is a case in point. The banks stress that “mortgage availability” is up, but the survey makes clear that “mortgage approvals” fell in February for the second successive month, hitting a five-month low.
While the fixation of so many, mortgage borrowing is of far less economic significance than what’s going in the commercial credit market. The survey showed credit growth slowing compared to the final quarter of 2012 – and such growth as there was went overwhelmingly to large firms. Net lending to small and medium-sized firms was actually negative every month between August and February, falling by almost £3bn.
SMEs are the lifeblood of the UK economy. They account for 60pc of private sector employment, half of private turnover and have long been hot-beds of innovation, creative and growth. Yet they’re currently be being starved of desperately needed capital by our biggest banks.
The banks claim to be ready and willing to lend, but insist the demand isn’t there. I just don’t buy that. Last August, the government launched the £80bn Funding for Lending scheme precisely to encourage lending to SMEs and such lending continues to plunge – denying these vital companies working capital and putting the kibosh on UK recovery.
The reality is that, in the current climate, many SMEs can barely afford to borrow on the draconian terms available. Base rates remain at 0.5pc, a historic low, but spreads are sky-high. SMEs are routinely offered loans at rates exceeding 6-7pc, if they’re offered at all, with hefty fees and commissions on top of that.
The big banks insist spreads have recently narrowed, but related fees have meanwhile gone up. When it comes to Funding for Lending, it now seems fair game for the banks to borrow money even more cheaply from the central bank but then not pass on that saving. And as the Credit Conditions Survey confirms in its fine-print, the banks anyway “don’t expect to be more willing to lend” in the next three months.
The British economy is suffering not from a lack of government spending, as the Keynesian spend-a-holics would have it, but from a chronic lack of private sector investment. Net of depreciation, such investment fell to just 1.2pc of GDP in 2012, down from 5.8pc in 2007 and an average of almost 5pc in the two decades prior to that. Our overall investment as a share of national income is, by a long way, the lowest in the G7 group of advanced countries – an absurd situation in a country with a “world-beating” financial services sector.
One reason for this investment drought is that while corporation tax rates have dropped in recent years, capital allowances have also been slashed. So effective marginal tax rates on new investments have, at best, been flat while falling elsewhere. This has hindered purchases of capital goods, while encouraging larger businesses to base investment-intensive projects outside the UK.
An even more significant explanation, though, of why our capital stock is stagnating – it grew by just 1.1pc in 2012, a twenty year low – is that our banks are failing to extend commercial credit to SMEs, or are often doing so only on terms so harsh as to kill stone-dead what would otherwise be feasible business plans.
If the UK economy is to recovef, our banks need to raise capital and then extend the finance needed to kick-start investment and commerce. One reason this isn’t happening is that banks are doing nicely lending out small volumes at high rates. More fundamentally, their capital raising is stymied as investors don’t trust banks’ financial statements given that risks are often under-stated and huge smouldering sub-prime related losses remain buried off-balance sheet.
Bank of England policymakers recently warned that UK banks need to raise additional capital of £25bn. Market estimates put the figure at nearer £50bn. The banks themselves insist that re-financing themselves would make lending even more difficult – but the truth is that noone really knows the state of our banking system. Politicians remain deeply reluctant to push the big banks into “full disclosure” for fear of what will be found.
The UK may avoid a triple-dip recession. But banking sector gridlock is turning our country – once a shining example of industry, ingenuity and enterprise – into a low-investment, low-productivity basket-case. Something has to give.