Can we see signs of a credit squeeze?

Aug 27 2010 by Bill Midgley, North East business executive

WHILE there are considerably more than ‘green shoots’ indicating economic recovery, albeit a little more slowly than some would desire, there remains some real concern surrounding at least two areas that may yet have a greater and longer impact on our competitiveness as a nation.

Lower than anticipated Government borrowing, some improvement in the level of exports, greater activity in the construction industry, company profits improving and tax receipts at a higher level than forecast must all be good news.

Although some of this is tempered by reports that not all exporters have taken advantage of the low level of sterling other than by increasing prices and profits. A short-term benefit, but markets lost or abused may never be recovered.

However, the two areas to which I refer are the continuing reluctance of the banks to lend and the curse of the ‘British Disease’ – inflation.

To some extent the two are interlinked and the policy of the banks may be a little deeper than is often acknowledged.

Inflation is still well above forecasts, 4.8% according the RPI, or 3.1% as measured by the Government’s preferred measure the CPI. It is this latter figure that will be used to increase benefits, yet I suspect that wage and salary demands will be based on the higher figure and, as we have already seen with the BAA settlement, there will be some hard negotiations ahead.

The attitude of many commentators who so easily pass over the inflation issue is disturbing.

So how do the banks fit in? By their own account they are taking in high levels of deposits and a return to high profit has strengthened balance sheets, so why so reluctant?

The banks maintain that they are not receiving applications of quality, yet businesses would argue to the contrary.

Those of a certain age will remember the days of credit restriction, queues for mortgages and banks having to make special deposits with the Bank of England all as a means of curbing demand and fighting the battle against inflation.

So is what we are seeing a back door credit squeeze, restricting the availability of finance to both individuals and business as part of a policy of reducing demand and holding down inflation?

A good, old fashioned, credit squeeze in all but name.

A wild idea, perhaps, and we are still in the silly season. Yet, why are the banks so reluctant?

Seemingly good lending proposals are rejected and the SME sector in particular is being rebuffed at a time when a more sympathetic approach would do much to strengthen recovery.

I do not expect the Treasury or the banks to admit to such a policy, if policy it is, but these supposed idle days of summer do give an opportunity to think through why the obvious is so difficult to deliver.

Bill Midgley is a North East business executive