Last week, the Office for National Statistics (ONS) gave us the news we were all expecting but least wanted to hear. In the three months to February, the seasonally adjusted index of industrial production decreased by 5.8 per cent compared with the previous three months and was 11.1 per cent lower than the same three-month period a year earlier. You have to go back thirty years or more to find a worse set of circumstances.
Ominously, the National Institute of Economic and Social Research’s monthly estimates of GDP suggest that the output fall, so far, is very similar to that of the recession, which began in the summer of 1979. If the 1980s profile were followed, it says, output would continue to decline for another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again. In other words, don’t expect much before 2012.
During the three months covered in ONS’ latest research, manufacturing output decreased by 6.5 per cent, compared with the previous three months. Between January and February, however, manufacturing output actually enjoyed its lowest rate of decline (0.9 per cent) of the past six months, but ONS cautions against raising any false hopes - monthly growth rate figures being notoriously volatile. The most significant decrease in output month-on-month was 3.7 per cent in the transport equipment industries.
Widespread decreases in output were reported for the three-month period. The most significant falls were 13.1 per cent in the transport equipment industries, 11.2 per cent in the basic metal and metal products industries and 11.7 per cent in the machinery and equipment products industries. Manufacturing output was 12.2 per cent lower than the same period a year ago.
Commenting on the figures, David Kern, chief economist at the British Chambers of Commerce said that while manufacturing output did not fall as sharply as feared, this should not obscure the seriousness of the problems facing the sector. “Over the past year, we have witnessed a severe decline in output, made worse by the collapse in world trade,” he said. “The sector’s skills base is facing real threats. UK manufacturing is already too small and avoiding further irreversible losses must be a national priority.”
Mr Kern’s opposite number at the Engineering Employers Federation, Steve Radley said that while further contraction in manufacturing signals another difficult quarter for the economy, the figures also mask some better news for parts of the industry, with “tentative signs of life” in some sectors. As Mr Radley points out, the fact that one of the worst hit sectors, basic metals, posted positive growth suggests that the fall in manufacturing activity might just be starting to level off. We can only hang on his welcomingly optimistic words.
And this glimmer of optimism is not confined to the manufacturing sector. According to the Nationwide Building Society’s latest Consumer Confidence Index, people felt slightly more optimistic about the current economic situation in March (the period of Nationwide’s survey), with 83% believing the current climate to be bad, compared with 86% in February. Alright, it’s a small change, but since the start of the year, a greater proportion of consumers (currently 58%) now believes that conditions will not be any worse in six months’ time.
Nationwide chief economist, Fionnuala Earley says that while overall consumer confidence has remained broadly stable since the start of the year, feelings about the current labour market have weakened, and further reports of job losses are likely to have affected consumers’ views of this. “Increased optimism towards the current and future economy is encouraging,” she adds. “Even though retail sales are now weaker, spending sentiment has remained stable. This stability isn’t surprising given further reductions on the high street and lower mortgage costs for some.”
But getting a loan – any loan – has become an intractable problem for business and consumer alike. Business owners struggling to access finance from major lenders are becoming increasingly sceptical about support from the government, despite the latter’s commitment to scrutinise the behaviour of banks via the Small Business Lending Monitoring Panel. This panel, which comprises officials from the Department of Business, Enterprise and Regulatory Reform (BERR), the Bank of England and HM Treasury, has met on just five occasions since it was set up in November last year.
In the House of Commons on April 2, BERR shadow minister, Mark Prisk quizzed the Treasury economic secretary, Ian Pearson, about the panel. He was told that, because it discussed “commercially sensitive” data, no minutes were being published. However, in its earlier assessment of the Pre-Budget Report, published on January 28, the Treasury Committee recommended that the panel “provide regular updates on the actual lending by the banks to the real economy”. The Forum of Private Business (FPB) is, understandably, concerned about the status quo, as expressed by the organisation’s policy representative, Matt Goodman:
“There is a real sense of confusion about the amount of money being lent by the banks and the nature of that lending,” Mr Goodman asserts. “Our members are reporting little change in their ability to borrow, which has been severely compromised as a result of the credit crunch. In addition, we are hearing about steep fees, excessive charges and additional security being demanded. Consequently, confidence in both the Government and banks is eroding.”
Research carried out by the FPB shows that the real cost of borrowing from banks remains restrictive for small businesses. As part of its submission to the government ahead of the 2009 Budget, the FPB presented the findings of its fifth Economic Downturn Panel survey of members, which took place between March 4-11 2009. In all, 35 per cent of respondents called for action in the forthcoming Budget to improve access to finance, while 29 per cent wanted measures to reduce the cost of credit.
The survey showed that, for 94 per cent of the businesses surveyed in March, terms and conditions of loans had not improved. On average, interest rates were 5.6 per cent over the Bank of England base rate (at 1 per cent during the survey period). In total, 81 per cent of respondents saw no change in the terms and conditions of overdrafts, with interest rates 5.8 per cent above the base rate, on average. In addition, 24 per cent reported increases in banking fees in March.
Not a single respondent said that bank support has improved. Half reported no improvement and 50 per cent said it is getting worse. The government fared little better, with 59 per cent believing that support from the government has not improved and 35 per cent that it has deteriorated. Only 5 per cent said the government is providing them with better support.
The latest figures from the British Bankers’ Association (BBA) show that overall bank lending increased by £211 million in February, similar to the rise in January. But the FPB claims crucial overdraft lending has not been restored to the level it reached pre-December 2008, when overdrafts fell dramatically by £457 million.
In addition, it says, the number of small businesses establishing new banking relationships decreased in February, a statement that directly contradicts BBA statistics director, David Dooks, who reports that significant numbers of new small business relationships continue to be established, despite the current recession. Indeed, the latest BBA statistics suggest that over 44,000 new small business banking relationships were established during the period.
I guess you pays your money and you takes your choice. There will always be some bones of contention between the banks and their small business customers, no matter what the prevailing economic conditions; it seems like only yesterday that the latter were complaining bitterly about excessive bank charges and shoddy treatment when times were booming. Surely, many a small business in the happy position of being able to take advantage of the capital bargains now on offer, would run the gamut of any obstacles placed before them, simply to get their hands on those elusive loans.
Les Hunt
Editor