Economy hit as promising firms ‘starved of cash’

Banks were accused yesterday of starving promising businesses of investment while propping up less productive firms.

Banks were accused yesterday of starving promising businesses of investment while propping up less productive firms.

Ben Broadbent, a member of the Bank of England’s monetary policy committee (MPC), said this “capital mismatch” explains why employment figures have remained robust even as the economy shrinks.

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His speech to Durham University’s business school came shortly after official figures showed unemployment fell in August by the largest amount in more than two years.

Broadbent said: “Some firms, it seems, are kept in business – and retain employees – despite making relatively low returns. Others, able to expand but unable to obtain the finance to do so, are forced to substitute labour for capital.”

He said the disparity in output and employment – equalling a fall in productivity – would probably be reversed, suggesting a eventual recovery will produce few jobs.

Broadbent, one of only two MPC members to oppose restarting the money printing programme in July, said monetary policymakers should take more note of changes in employment, which in recent years had given a better indication of inflation trends.

His comments follow a speech in Edinburgh by fellow MPC member David Miles, who on Tuesday insisted that the Bank was still primarily focused on its inflation target of around 2 per cent. He said inflation provided the best economic indicator, as it reflected both output and employment.

DOMINIC JEFF