Yesterday saw the Bank of England release their latest Money and Credit Statistical Release. Yes, I know, it sounds dry. But actually, trends in the amount of credit, who the lenders are and who they lend money to can give us an insight into the economy.
Unfortunately for the UK, it doesn’t look good.
First thing’s first – lending to the real economy (i.e. parts of the economy that produce tangible goods) on the whole is down. This means businesses that need credit to ease cashflow issues are not getting hold of the money they need which leads to concerns about how they fund materials, produce output and pay wages.
Indeed lending overall to both PNFCs (private non-financial companies) and SMEs (Small-Medium Enterprises) over the past 12 months has decreased by 3.2% between September 2012 and September 2013.
Secondly, lending that is secured on dwellings (i.e. mortgages) has increased. This means the value of total lending has increased over this period which may mean more people are being issued mortgages but will also be influenced by increasing house prices – the loan value will be larger. Furthermore, the Government’s Help to Buy II scheme will mean potential homeowners need a smaller deposit – as the Government underwrites a proportion of it – but the mortgage value is therefore much larger.
This is dangerous as banks seem more interested in lending to finance house buying rather than lending to finance business investment. This is hardly surprising as the Government has said it will underwrite £130bn of mortgages giving banks the incentive to move towards this lucrative area.
Thirdly, consumer credit has increased. While consumption within an economy is often seen as the indicator of economic strength, consumption via credit may lead to debt issues further down the line. Are households using credit to maintain a certain standard of living? Or are they using credit to pay for basic living costs such as food and housing because wages have stagnated?
So what does this mean for the UK? Well, there may well be significant dangers ahead. The Government has clearly indicated to banks that lending in the form of mortgages will be less risky (and arguably more profitable) than lending to invest in businesses. The long-term sustainability of this is obvious – where will business investment, jobs, wages and output come from? Furthermore, it won’t do anything to solve the housing crisis which has severe supply issues – this will only inflate prices further.
On a household level, there may well be problems for loan repayments. Bank of England base rates (this is the rate at which the Bank of England lends to private banks) are low – historical lows, in fact. These are now ‘pegged’ to the unemployment rate. When unemployment gets to 7%, the Bank of England will consider raising base rates. When these rates rise – and let’s be honest, there is only one way for them to go! – then mortgage and credit repayments will increase which may lead to people falling into debt trouble, arrears and possible repossession.
See? Bank stats don’t have to be dry!