Business lending and construction cause for concern

Boosting lending to smaller businesses is an important goal for the Chancellor George Osborne, while sharp falls in construction output were largely responsible for the economy shrinking in late 2011 and early 2012, and threaten to tip Britain back into recession.

However, the central bank has been sharply split for the last two months over whether the right response is to restart its purchases of government bonds, or try other measures.

Yesterday’s data is unlikely to shift the debate too far, but shows the challenges facing the Monetary Policy Committee.

Markit/CIPS construction PMI data turned out weaker than expected. The monthly survey of purchasing managers rose to 47.2 in March from 46.8, suggesting the sector contracted again but not as sharply as in February.

Markit, which compiles the survey, said unusually cold weather combined with sluggish demand kept a lid on construction work in March.

“The negative print for construction output mirrors that seen for manufacturing, and now leaves the service sector as the last great hope for avoiding another slide in UK GDP,” said Markit.

“It seems highly probable that the sector suffered renewed and appreciable contraction in the first quarter of 2013 after all too rare expansion in the fourth quarter of 2012,” said Howard Archer, economist at IHS Global Insight.

A PMI survey for the service sector in March due out today will give a clearer sign of whether Britain’s economy as a whole avoided its third recession in less than five years, having already contracted in late 2012.

A separate survey by the Bank showed British banks preferred to lend to home-buyers and big companies rather than small businesses during the past three months, and intend to do the same in the months to come.

The availability of mortgages and business loans more generally was forecast to expand, but at a slower pace than earlier in the year, banks said.

More than five years on from the start of the financial crisis, the distribution of bank lending is a politically and economically sensitive issue.

In the middle of last year the central bank and the Government launched a scheme to boost lending and reduce interest costs, but it has had mixed success.

“A strong possibility is that the Funding for Lending Scheme will be adjusted to specifically favour banks that increase their lending to smaller companies,” said Mr Archer.

The banks surveyed by the Bank said small businesses’ demand for lending dropped sharply in the three months to early March and banks were wary of the more risky loan applications.

Banks expected demand from both small and large businesses to improve significantly over the next three months, however.

They also said the Bank’s Funding for Lending Scheme had reduced their borrowing costs and the premium they charged for mortgages and for lending to both large and small companies. This was the first fall in loan spreads for small businesses since the survey started in late 2009, though banks said they were cutting rates for larger firms more sharply.