The latest set of credit flow data confirms suggestions the UK economy remains poorly balanced with growth primarily hooked on debt-driven household consumption.
One of the concerns among commentators and economists has been the fact that the British economy remains too dependent on debt-driven domestic consumption and the housing market and less on production and exports. The fresh figures from the Bank of England's (BoE) Money and Credit Report show that this pattern persists.
The number of mortgage approvals picked up briskly again in June after the previous four months of moderation while inflow of credit to companies fell sharply during the same period.
Loans to non-financial businesses decreased significantly by £3.4 billion in June, which was well above the average monthly fall of £0.9 billion in the previous six months, while twelve-month rate decelerated by as much as 3.8%, the BoE data showed on Tuesday. Loans to small and medium-sized businesses managed to pick up slightly by £0.2 billion, but the rise was below a six-month average and the year-on-year rate fell 2.8%.
Meanwhile, lending secured on dwellings surged by £2.1 billion which was well above a six-month average of £1.9 billion and the number of mortgage approvals jumped to 67,196 in June, the largest since February this year.
A pick-up in mortgage approvals was also reported by the British Bankers' Association (BBA) last week: "Having declined during the early months of 2014, approval volumes turned up in June, in the aftermath of the implementation of the Mortgage Market Review, which might have slowed down the processing of applications in the earlier part of the year," the BBA said in its report last week.
Despite the BoE's commitment to cooling down the piling up of household debt, secured lending to households for home purchases remains strong while credit flow to the UK companies staggers.
"the UK housing activity is expanding again as the temporary hit from stricter mortgage rules passes ... With interest rates very low and house building way behind the demand for new homes we look for house prices to gain 10% in 2014 and 2015,"
Berenberg's UK chief economist Robert Wood said today.
Commenting on lending to SMEs, IHS Global Insight's Howard Archer said the "sharp fall in net lending to businesses in June looks both disappointing and worrying, as it is vitally important for sustained, balanced UK growth."
Weak lending to firms remains a puzzle during a time of ultra-loose monetary policy and record low interest rates. In its July 'Agents' summary of business conditions', the BoE said that "net lending growth had continued to be adversely affected by the unwinding of legacy positions by some banks."
The latest GDP data release also suggested a tentative slow-down on the output side of the economy with manufacturing sector output slowing down markedly in the second quarter to a growth of 0.2%, down from 1.5% in the first quarter. Total production also slowed down.
Businesses call for low rates for longer
UK businesses argue the BoE should keep monetary policy loose for longer despite the fact that growth has been getting a strong footing recently.
In its commentary on the latest GDP data, David Kern, Chief Economist at the British Chamber of Commerce (BCC), argued that it was important:
"to increase the contribution of exports and investment if this recovery is to become truly sustainable. In order to support the businesses driving the recovery the MPC must provide assurances that interest rates will not be raised until there is a clear case to do so."
BoE's Broadbent plays down deficit threat to growth
BoE Deputy Governor Ben Broadbent said this week the UK's current account deficit "cannot be said to pose some independent, existential threat to UK growth."
Broadbent admitted the UK's current account deficit is now "significantly larger than at the time of any of the UK's many post-war currency crises in the 1950's, 60's and 70's", but he also said this wide gap "is not, in fact, the result of a worsening trade performance." Instead, "the cause of the deterioration in the current account is, instead, a sharp drop in the net income received on the UK's overseas balance sheet."
On the trade deficit, Broadbent argued that "despite a much weaker recovery in the UK’s trading partners than at home, the gap between exports and imports has actually narrowed slightly over the past few years", which he said was mainly due to "surprisingly weak imports."
"If the global economy remains sluggish, it will inevitably be harder for an open economy like the UK to achieve both strong and balanced growth," Broadbent said to an audience at Chatham House in London today.