Britain’s recession warning

Well that didn’t last long. 2013 started with an economic bang – Congress unexpectedly steering clear of the fiscal cliff, UK stock markets rising to the highest level since mid-2011, data showing better manufacturing sector output than expected in December. But today that honeymoon came to an abrupt end.

First and most obviously are those services PMI data. Given the services sector accounts for three quarters of UK economic output, any fall in activity should be regarded as a cause for concern. And this latest fall in the PMI – from 50.2 to 48.9. Not only is that below the crucial 50-mark that separates expansion from contraction, it’s the lowest level since the very depths of the 2009 recession.

Taken together with the manufacturing and construction PMIs, which cover the other main parts of the private sector, this suggests that the economy contracted by around 0.2% in the final quarter of 2012. Now, one quarter of contraction alone doesn’t denote a recession (you need two consecutive quarters to fulfil that criteria), but it hardly bespeaks an economy which is showing any convincing signs of recovery.

Nor did the latest swathe of lending data from the Bank of England. The number of mortgages being approved in November may have risen to the highest level in 2012, but they are nonetheless still far lower than before the crisis.

Mortgage approvals (source: Bank of England)

And the annual growth rate of mortgage lending dropped back to equal the lowest rate on record.

The picture for businesses is even less promising. In November, British businesses money-raising (whether through bank finance, equity issuance or bond raising) contracted at the fastest rate since mid-2010.

Funds raised by UK businesses (Source: Bank of England)

Now, these figures are volatile, but the collapse in lending to businesses during this recession has been worse than in any slowdown since the mid-1960s.

So how does one reconcile this miserable data with the rather more promising news from the Bank of England’s Credit Conditions Survey yesterday that “availability” of credit has risen to the highest level since it started collecting data on it in 2007?

The most likely explanation is that there simply isn’t the demand for credit. It goes back to the question of why we’re in a rut at the moment. Some suggest the banks and financial system are largely to blame: that because they’re not lending, Britons are unable to get the finance they need, which in turn prevents the economy from expanding. But these data, taken together indicate that, instead, while there is credit available out there, everyone is simply too strapped or too scared to borrow any more.

Or alternatively it’s all a statistical glitch and the figures next month will tell another story entirely. Sadly these days there’s no way of knowing for sure. And the PMI data hasn’t always reliably prefigured the official growth numbers.

On the bright side, to finish with some better news, the amount banks wrote off in bad loans dropped to the lowest level since the start of the crisis in Q3 2012. So it’s not all gloom.

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