Martin Flanagan: New threat to recovery is irrational conservatism

Published on Thursday 19 November 2009 21:18

BUSINESS lending continues to look sickly. The patient may be keeping down a little dry toast and warm milk, but it sure isn't going for a jog around the block.

Bank loans to business shrank by 4.6 billion in September, according to the Bank of England's latest Trends in Lending report.

That was the eighth month running that lending to the corporate sector has contracted, and the latest fall is much greater than the 1.1bn drop in August.

This despite all the extra money the Bank of England has been pumping magically into the economy by electronic keystroke – so-called quantitative easing. And despite the government keeping up the pressure on the banks, particularly our bailed-out ones, to lend to UK plc to help carry us through to recovery.

The banks say this is not all their fault. They point to weak demand from businesses, many of which want to bolster their balance sheets rather than go further into hock.

And the banks have some independent support for this view. The Federation of Small Businesses says Britain's 4.8 million small and medium-sized companies have saved 52bn this year – very close to the 56bn they have borrowed.

For every small business that wants credit, then, it seems another wants to live off its own capital to get through the downturn.

This dual picture is borne out by the Bank survey. The Bank's regional agents say that although availability of credit may have eased slightly since the spring, many firms are still voicing "concerns over access to finance".

Business demand for loans is expected to continue to be subdued for the rest of 2009. You wouldn't want to bet big that demand will rebound strongly in the first half of next year, either.

It looks like a lot of funds raised by bigger companies on the capital markets, both bonds and equities, are being used to pay down bank debt.

You could argue, then, that an outbreak of business virtue has occurred, rather than just lambast the banks for alleged stinginess.

The worry, however, is that too much irrational conservatism on the part of businesses and their banks about loans will stifle Britain's economic recovery.

Howard Archer, chief UK economist at IHS Global Insight, says the latest data "will maintain the concerns of the Bank of England's monetary policy committee that muted bank lending to businesses remains a significant threat to the strength and sustainability of any recovery".

This picture of slack lending is also consistent across all the main sectors of the economy currently, said yesterday's report.

Taken in conjunction with the latest data showing that the public finances are going to hell in a handcart, and direct tax rises look a virtual racing certainty, it all paints a depressing picture.

Sub-Churchillian, I know, but it looks that, in terms of any economic recovery, the best we can say is that it is perhaps "the end of the beginning".

Marriage well brokered

MOVING with the times and all that jazz. Or should that be "Caz"?

JP Morgan Chase yesterday bought the 50 per cent of blue-blooded broker Cazenove it did not already own for about 1 billion. That, in turn, will see multi-million-pound windfalls for a panoply of top London dealmakers, epitomised by the almost ineffably discreet chairman of JP Morgan Cazenove, Sir David Mayhew.

The latter will remain chairman of the entity and the brand that will now be a fully owned subsidiary of the American investment banking giant.

A full merger always looked the way the wind was blowing after JP Morgan bought half of the near-200-year-old British broker five years ago.

That fusion of British corporate contacts and advisory style with American cash and vigour was a staging post.

Cazenove has decided after the five-year courtship that this live-in relationship can be formalised in full marriage in the holy cathedral of capitalism.

In living together before full commitment, how unexpectedly modern-thinking Caz proved.

And for JP Morgan? After being seen as one of the major players to have best weathered the financial crisis, the takeover looks another smart move.

Tally-ho, as the Americans don't often say.