Comment: Funding for Lending could yet save the day
THE timing couldn’t have been much better for the launch yesterday of the Bank of England and Treasury’s “Funding for Lending” scheme. To show just how much the whizzy new alternative to the quantitative easing (QE) programme is needed, the latest depressing UK economic data came round right on cue.
UK manufacturing shrank at its fastest in more than three years in July, alongside news of yet more pressure on Britain’s cautious, debt-laden consumers.
The Nationwide reported that UK house prices declined 2.6 per cent year-on-year last month, the biggest annual fall since the summer of 2009, when we were shortly to come out of the first part of Britain’s double-dip.
It is a hope, rather than an expectation, that the Funding for Lending programme will provide the incentive for banks to lend and alleviate the problems for businesses trying to access finance in this chronic (in every sense of the word) downturn.
There have to be caveats because of the only limited success of previous initiatives to get banks lending to business, such as Project Merlin and the National Loan Guarantee Scheme.
The central paradox remains that although banks have been partly constrained in their lending by regulatory requirements to build up their capital cushions, those banks can’t force small and medium-sized businesses to take up loans if they do not want to in this highly uncertain economic climate.
It is important that Funding for Lending gets to entrepreneurial businesses which might not otherwise have satisfied strict bank lending criteria for their start-up and expansion plans.
Theoretically, the initiative could provide a greater fillip for any UK recovery than has been available before because the money is open to a wider range of businesses.
The touchstone for the scheme will be how much business borrowing costs come down and how much overall lending goes up, particularly to the SME sector.
However, there needs to be stick as well as a carrot.
Regulatory pressure, from the Bank of England downwards, has to be kept up on banks to divert more money to lending to businesses and households and away from largesse to rainmakers and shareholders.
As Prime Minister David Cameron and his Chancellor George Osborne have claimed, we are supposed to be all in this recovery together. A successful Funding for Lending scheme would extend some needed credence to that claim.
Patient is stable and on road to recovery
TAYLOR Wimpey’s turnaround since the dark debt-swamped days of 2009 that led to losses of nearly £2 billion has been impressive. But the strategy has been far from individualistic.
Most of the housebuilding sector has gone down the same route to recovery, with varying degrees of success, since the industry downturn was ushered in round about the time of Northern Rock’s collapse in 2007.
Costs have been savaged, job losses have been high, and volume has been eschewed in favour of caution, value and margins. Foreign operations (in Taylor Wimpey’s case, North America) have been exited to focus on squeezing value out of smaller, streamlined operating models.
The evidence of the strategy’s success was all there again yesterday with Taylor Wimpey. Operating profits up more than 50 per cent, order books up 18 per cent, more completions, better average selling prices and the return of the dividend earlier this year after a lengthy absence.
Taylor Wimpey and its peers have been helped in their turnarounds through having the space and time to streamline; the uncertainty of mortgage availability and depressed economic conditions (see above item), including high unemployment, have provided the ideal conditions for them to lower their sights to focus doing better with less.
There may come a time when housebuilders will again get gung-ho on UK landbanks and foreign expansion, fuelled by major debt, because the underlying dynamic in the UK is that there is more housing demand than availability.
But, for the foreseeable future, it is virtually certain that Wimpey and others will continue to be measured and margin-conscious.
The sector’s stabilisation has been incremental, but nonetheless real for all that.
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Wednesday 19 June 2013
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