UK PLC: the first quarter shows promise
05 June 2013
Lending stagnates but there's better than expected growth on the horizon, if the latest Purchasing Managers Index is anything to go by.
The news from the Bank of England last Monday (June 3) that net lending by Funding for Lending Scheme (FLS) participants over the first quarter of 2013 was down by around £0.3bn did not impress business leaders, despite it being an improvement on the fall of £2.4bn in the previous quarter.
Phil Orford of the Forum of Private Business said the figures will be another disappointment to small firms, particularly after what he referred to as recent 'tweaks' to the government scheme and especially after the glimmer of hope that last month's GDP figures provided.
"The FLS has supported the supply side, most noticeably with mortgage lending which has led to an improvement in demand," says Mr Orford. "It is now imperative that the major banks focus on delivering the same successful formula to businesses with innovative and attractive products. FLS is there to help promote demand for lending and support economic activity and in that respect, most of the major lenders are still falling short."
The CBI's director for competitive markets, Matthew Fell was a little more conciliatory. He believes the FLS is reducing the cost of finance for businesses and households, despite disappointing lending figures overall.
"There are substantial headwinds hampering lending, including a lack of confidence amongst businesses and deleveraging by banks. The banks are clear that their ability to lend has been improved by the scheme, and more small businesses are seeking finance as a result.
However, Mr Fell says FLS is only one part of ensuring growing firms have the finance they need and urges businesses to consider other available options as well, like equity finance or retail bonds.
Meanwhile, the latest Markit/CIPS UK Services Purchasing Managers Index published on Wednesday (June 5) hints at better than expected growth this quarter.
UK service sector activity rose at an accelerated rate during May as new business increased at the sharpest pace for over three years. Amid evidence of marginal capacity pressures and with positive expectations for the coming year, companies added to their payroll numbers for the fifth consecutive month.
Meanwhile, latest price data showed that cost inflation maintained a downward trend, hitting a one-year low, while competitive pressures led to a slight fall in average output charges.
The headline seasonally adjusted Business Activity Index remained firmly above the 50.0 no-change mark during May to signal a fifth consecutive month of service sector growth. Moreover, reaching 54.9, up from April’s 52.9, the index signalled a rate of growth that was the sharpest since March 2012.
Underpinning the increase in activity was a combination of higher sales volumes, promotional activities and new product launches. A number of companies also reported that better weather had supported growth. This factor also helped drive the sharpest rate of new business growth since February 2010, although improved market conditions were also widely mentioned.
Although modest, growth of employment was the sharpest for three months, with additional staff not only recruited to deal with current workloads but also in anticipation of growth in the coming months. Business confidence was a little firmer in May, with 46% of respondents expecting to experience a rise in activity in 12 months’ time.
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