The UK economic growth surge exposes the real evidence on bank lending

Anthony Browne
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WHEN Charlie Bean, deputy governor at the Bank of England, gave his speech this week on the UK’s economic outlook, he admitted that the Old Lady was surprised with what was happening. The Bank’s analysis showed that the “recent run of UK data has been unusually strong relative to market expectations”. There are “at last signs that the recovery may be gaining traction”.

Two factors were identified as supporting this resurgence. UK banks “have made considerable progress in bolstering their capital positions… [and] are now well placed to provide the credit necessary to support recovery”. And “the euro area is no longer in existential crisis”.

I can’t say I’m enormously surprised by this. Despite much rhetoric that “banks are refusing to lend”, there is growing evidence that banks are supporting the recovery by providing businesses with the finance they need.

British Bankers’ Association (BBA) figures out yesterday show not only that net business lending increased by £2.9bn in September, but that it rose at the fastest rate since 2009. The Bank of England has also reported double digit increases in gross lending to SMEs. This gross lending is the amount of new lending by banks, and is the best measure of the availability of finance.

Not only is bank lending starting to rise, but the interest rates charged are still historically low. Analysis by the Federation of Small Businesses reveals that over 32 per cent of SMEs are being offered interest rates of less than 4 per cent, and over 25 per cent of firms are being offered rates between 4 per cent and 4.99 per cent. There has never been a better time for companies to borrow.

This tentative rise in business lending comes after a long period of decline during the recession. The lack of confidence caused businesses to retrench, taking out fewer loans, paying off existing debts, and building up their savings.

The appetite for borrowing is increasing, but there are many signs that demand is still muted. In total, £15.3bn of agreed business loans and 45 per cent of agreed overdraft facilities are currently unused.

The return of confidence is obviously more clear-cut in the housing market. BBA figures out yesterday showed that demand for mortgages has surged, with approvals for loans up by nearly 40 per cent on a year earlier. The 42,990 home loans approved in September was a jump of 10 per cent on just the month before, and the highest level since December 2009.

Tomorrow, the Office of National Statistics will publish its GDP figures for the third quarter. The current consensus is that the UK will have grown by 0.7 per cent. But many are predicting a higher rate, giving the UK an annualised growth rate of around 3 per cent. That would not only be better than the US and the Eurozone, but would mean we are enjoying above-trend growth – an exhilarating experience after the longest recession since the 1930s. It would mark an extraordinarily rapid turnaround from a few months earlier, when we were all fretting about entering a triple-dip recession. That would give the Bank of England a really big surprise. But what a surprise to have.

Anthony Browne is chief executive of the British Bankers’ Association.