Last weekend the Prime Minister announced yet another “anti-recession” plan which included the “creation of up to 100,000 new jobs”. There was also more talk of bringing forward planned public spending projects. Here was our Prime Minister, man of action and saviour of the nation, at the helm micro-managing the road back to economic prosperity.
But it was little more than a cheap party political stunt and it will not work. The economy is in the grip of a pernicious and deepening recession and will not recover in the second half of this year, as we were promised by the Chancellor as recently as in the Pre Budget Report on 24 November. He had the courtesy to acknowledge this inescapable truth earlier this week. Come the Budget, the GDP forecasts, along with the horrendous public borrowing figures, will look incomparably worse. One attempts to avoid obvious analogies, but as the chill winds of winter are making a mockery of the great global warming narrative, so the chill winds of recession are making a mockery of the Government’s remaining claims to economic competence.
Even as people are urged to “spend, spend, spend” in order to lift the economy out of recession, all the economic evidence shows that households are reining in after the years of credit-fuelled excess. Two key indicators are housing equity withdrawal (HEW) and the saving ratio (broadly defined as the ratio of saving to household disposable income). In the heady days of 2002 to 2007, consumers extended their mortgages in order to buy all sorts of consumer “goodies”. Large and positive HEW was a significant driver behind to consumer boom. People are doing just the opposite now – with the inevitable knock-on effects for the High Street and car show rooms. The saving ratio collapsed in late 2007 and actually turned negative in the first quarter of 2008, as “shop ’til you drop” hedonism gasped its last. People are battening down the hatches now and building up their savings. They are making the necessary, long overdue, adjustments to their balance sheets. There will be no consumer-led recovery for many a month.
But there is a dangerous feature of the economy that risks turning the recession into a slump. And that is the lack of credit availability. Today the Bank of England cut interest rates again – it could very well be for the last time during this economic cycle. We are probably at the point where interest rate cuts have vanishingly diminishing returns. Few people expect the banks to pass on the full 0.5% cut, despite exhortations from the Prime Minister. Banks must continue to attract deposits and they are desperate to mend their battered balance sheets and improve profitability. And, in any case, rates are now so low that, after the cuts of recent months, further reductions begin to look rather trivial. The cost of credit, courtesy of the Bank of England and Britain’s beleaguered savers, is not the issue.
Credit availability is the key issue. Last week the Bank of England released its latest Credit Conditions Survey. It made grim reading. Despite falling interest rates and October’s bank rescue, banks are still ultra-cautious in their lending. As the recession intensifies, banks will face increased defaults on their current loans and the risks of new lending to firms and households can only increase. According to the Bank, credit availability had actually deteriorated in the final quarter of 2008, and worse is expected in the first quarter of 2009. Bank lending to non-financial businesses is slowing alarmingly and mortgage approvals have collapsed.
If banks are to be encouraged and enabled to lend – and they must be – the Authorities must take further action as a matter of urgency. Having, rightly, rescued the banks last October, a strange inertia appears to have taken overtaken the Treasury. Guaranteeing business loans must be a priority, as emphasised by the Conservatives. But extra support for the still over-priced housing market should wait. That housing bubble is still bursting – and politically unpopular though this may be - it must be allowed to burst. The Chancellor did actually announce guarantees for lending to exporters and small businesses in the afore-mentioned Pre Budget Report. But nothing, apparently, has happened.
Additionally, there are, we are told, discussions in the Treasury for a plan to relieve banks of their “toxic assets” and putting them in a “bad bank”. But discussions they remain. Meanwhile, over at the Financial Services Authority, banks’ capital requirements are being tightened making it even harder for them to lend, even as they are being exhorted to lend more. The FSA and the Treasury should review this policy. Other suggested measures for boosting bank lending litter the financial pages of our quality press.
No-one is pretending that these measures would be costless and/or easy to implement. But improved credit availability is of great significance. The Government must not just to plan a coordinated set of measures to encourage the banks to lend more, it must also implement it. A Financial Times leader on unblocking lending to business was headed “Get on with it”. I couldn’t have put it better myself.
