Light at end of tunnel despite drop in corporate lending to six-year low

LENDING to businesses is expected to fall to its lowest level for six years despite a raft of measures aimed at freeing up the flow of credit, a new report warns today.

However, the Ernst & Young Item Club said the outlook for the coming year was brighter, as the financial services industry was showing signs of “slowly” turning the corner and income across Britain’s big banks should stabilise in 2013 before returning to modest growth in 2014.

According to its latest report into the outlook for financial services, corporate lending is forecast to shrink by 4.6 per cent this year, dropping to £429 billion by the end of the year – the lowest level since 2006 – despite initiatives such as the Bank of England’s £80bn Funding for Lending scheme.

Carl Astorri, senior economic adviser to the Item Club, said this year’s decline will be slower than the 6.1 per cent drop in 2011 and growth should resume next year, but lending will not return to pre-financial crisis levels until 2016.

Astorri also warned that small businesses will “continue to feel the squeeze” as banks come under pressure from regulators to shore up their capital. He said evidence from the Federation of Small Business shows that 38 per cent of SMEs have had their applications for loans rejected this year. That compares with average rejection rates of around 11 per cent between 2005 and 2008, when the financial crisis erupted.

Ernst & Young also predicted that profits across the insurance industry will start to recover next year, but Funding for Lending is unlikely to stimulate the mortgage market, where residential loans look set to grow just 1.3 per cent this year, barely changed from the 1.2 per cent expansion seen in 2011.

Meanwhile, business sentiment regarding the wider economy has risen to its highest level since April according to the latest Lloyds business barometer, although its report found that companies’ optimism about their own trading prospects had fallen to the lowest point this year. Only 40 per cent of firms surveyed said they were upbeat about their outlook, compared to 51 per cent in September.

Trevor Williams, chief economist at Lloyds Bank Wholesale Banking & Markets, said that economic growth in the fourth quarter of the year is likely to be “somewhat lower” than the third quarter, when the economy grew by 1 per cent, ending nine months of recession.

Bank of England deputy governor Charlie Bean yesterday said there was “reason for some optimism” over the economy but he cautioned against an over-enthusiastic response to last week’s GDP figures, pointing out that a proportion of the growth was caused by one-off factors such as the Olympics.

Bean said the squeeze on households’ spending power, caused by higher utility, food and commodity prices, “should not be so intense” and progress has been made towards tackling the problems in the eurozone.

He added: “Utility prices will be going up again and probably a spike in food prices because of the unusual weather but, generally speaking, real household incomes won’t be squeezed quite as much.

“There is still a long way to go there but again, a slightly better picture and also some signs that maybe conditions are improving in the banking system.”