Slide in UK business lending undercuts improved consumer morale

By David Milliken

LONDON (Reuters) - British business lending fell sharply last month, raising questions about the durability of an economic recovery that has helped lift consumer sentiment to a six-month high.

Britain's government and central bank are concerned that poor access to finance, particularly for smaller firms, may thwart a sustainable recovery from the country's worst slump in decades, and data on Friday showed the scale of the problem.

Net business lending dropped by 3.0 billion pounds in April to stand 4 percent lower than a year earlier, despite a central bank programme to boost credit to households and businesses, Bank of England figures showed on Friday.

Similar seasonally adjusted data showed a 1.2 billion pound monthly drop, and lending to small businesses alone also fell.

"It's a disappointing set of numbers," said Societe Generale economist Brian Hilliard. "The problem getting credit to small and medium-sized enterprises seems to be pretty intractable, and it be may be more of a demand-side issue than a supply-side one."

The Funding for Lending Scheme (FLS) has lowered banks' finance costs and made mortgages cheaper since it opened in August. The bank's data showed mortgage lending had shot up.

But the FLS has had less impact on small business lending, and last month the Bank modified the scheme to encourage banks to favour this kind of lending over mortgages, which are simpler to administer.

Britain's economy is in a state of fragile recovery after contracting for much of 2012, and earlier on Friday the British Chambers of Commerce raised its growth forecasts for the first time since the financial crisis.

The economy grew a stronger-than-expected 0.3 percent in the first three months of 2013. Purchasing managers' surveys suggest steady expansion continued in April, and a GfK survey on Friday showed consumer sentiment hit a six-month high in May, with its main balance rising to -22 from April's -27.

"There are now some real signs that consumers, while hardly confident, are moving out of the feeling of despondency that the country has been mired in for the last year or so," said Nick Moon, managing director of social research at GfK.

FRAGILE RECOVERY

Britain's financial crisis and subsequent falls in output and above-target inflation have reduced living standards to their lowest in almost a decade, sapping consumer demand.

But more recently the Bank has offered a stronger outlook for growth and a lower path for inflation for the first time since the crisis, offering hope that pain for consumers will ease.

However, the BCC - which expects growth of 0.9 percent this year, slightly above economists' consensus - warned that the recovery was not yet on a solid footing.

"Economic growth is still too weak, and the pace of recovery will remain unduly slow for a while yet. We are still a far cry from getting the economy fully back on track," said BCC director-general John Longworth.

The one part of the economy that does seem to be picking up is the housing market, which is benefiting from the FLS and government plans to offer subsidised mortgages.

Lender Nationwide reported the fastest annual house price growth in 18 months on Thursday, and the Bank figures showed an 875 million pound increase in net mortgage lending, well above expectations in a Reuters poll for a 500 million pound rise.

Mortgage approvals, which are a leading indicator for lending and house prices stood at their highest level since January at 53,710, though this still represented a smaller increase than economists had forecast. It is also well below pre-crisis levels of around 90,000 a month.

Net unsecured consumer lending rose by 524 million pounds, above expectations but the smallest rise since January.

(Additional reporting by William Schomberg and Christina Fincher; editing by Ron Askew)

Source: http://news.yahoo.com/slide-uk-business-lending-undercuts-improved-consumer-morale-115210894.html

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