No Improvement In Dire Lending Conditions

Friday, 31 August 2012

This morning's Bank of England data release showed that total net lending to individuals rose by a meagre £0.9 billion in July, hot on the heels of a £0.1 billion decline in June. These disappointing figures are down from a recent peak of £1.4 billion in March. Ultimately, lending has collapsed since the start of the financial crisis and has shown no evidence of picking-up. For six months in 2007, monthly increases in lending to individuals rose by over £10 billion. However, this metric has not breached £2.0 billion since mid-2008. 

The forces of economic gravity continue to suppress credit growth. Initially, the double dip-recession was mild, with the economy showing a contraction of 0.3% over the final three months of last year. By the middle of 2012 the situation had become more worrying, with the overall size of the economy decreasing by 0.5% in the second quarter of 2012. Combined with this, there has been a move toward part-time employment and temporary work - both of which are often more precarious and lower-paid than traditional full-time work with a company or in the public sector.  These two economic fundamentals, to do with the overall health of the economy and the nature of peoples' work, have damaged households' credit-worthiness, making it more difficult for them to get loans and mortgages.

Looking forward, the UK economy is reliant on consumers parting with their cash, keeping retailers afloat. When lending is weak, households tighten their belts and so have difficulty funding their consumption. This bears down on economic growth and employment, making consumers less credit-worthy, so further decreasing the loans and mortgages available to them. An increase in lending would be an important contributor to a recovery by giving consumers cash to spend in order to get the economy moving. However, the economy must show signs of improvement in order to entice banks into lending again. The economy is unlikely to get out of this cycle any time soon.