Economy booms but worries linger

Britain’s economy is set to gather momentum this year, forecasts yesterday confirmed, but there were fresh warnings over the resilience of the manufacturing sector and lending to small businesses.

The picture was a less bright one for the countrys factories. Picture: Getty Images
The picture was a less bright one for the countrys factories. Picture: Getty Images

As widely expected, the International Monetary Fund (IMF) raised its forecast for the UK economy, pencilling in growth of 2.4 per cent this year – faster than any other major European economy – against a previous forecast of 1.9 per cent. For 2015, it expects 2.2 per cent growth.

The revisions bring the IMF’s 2014 prediction in line with that of the independent Office for Budget Responsibility.

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The IMF report noted: “Activity in the UK has been buoyed by easier credit conditions and increased confidence.”

But it warned that “economic slack” – spare capacity left in the economy, which can be measured by factors such as unemployment – would remain high.

The report’s reference to credit comes after households’ access to finance was boosted by the Funding for Lending Scheme (FLS) and Help to Buy. But figures from the Bank of England yesterday showed an on-going fall in net lending to businesses, with a £4.3 billion decline in the three months to 30 November.

The slump came despite the FLS being tweaked last year specifically to favour lending to smaller businesses and the central bank’s latest credit conditions survey reporting a “significant” increase in credit availability to corporates in the fourth quarter of 2013. A further increase is expected in the opening months of this year.

The data comes in the wake of a damning report by a committee of MPs, which noted small and medium-sized businesses are still struggling to access finance despite efforts by the UK government to boost lending. Richard Fossett, chief executive of online funding specialist TradeRiver Finance, said: “Challenges remain for SMEs to obtain finance from banks directly and smaller companies are increasingly seeing the benefits of alternative finance options.”

Howard Archer, chief UK economist at IHS Global Insight, added: “With the UK sustaining a decent level of economic activity and prospects looking relatively bright, it seems highly likely that business demand for credit will pick up appreciably over the coming months.”

Also striking a cautionary note, the CBI’s latest industrial trends survey showed factory orders pulling back from recent 18-year highs this month amid a downturn in exports.

The poll of more than 360 industrial bosses revealed the weakest reading for exports since July, which led to a fall in the sector’s total order book relative to normal levels.

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The downturn in orders failed to dent optimism, however, with expectations of growth in new orders for the next quarter at its strongest since April 2012.

Stephen Gifford, the CBI’s economics director, said the manufacturing recovery remained on track, but cautioned now was “not the time to take our foot off the gas”. He said: “There are still risks ahead and our manufacturers need help to break into high-growth export markets.”