Chancellor Alistair Darling has said that he is confident that Britain will return to growth around the turn of the year. But the latest run of data has made it clear that we’re “nowhere near out of the woods yet”, said Colin Ellis of Daiwa Securities. Retail sales weakened in August, while business investment fell by 18% year-on-year in the second quarter. The latest PMI survey of manufacturing activity shows that growth in the sector slid back below the zero line last month.
Bank of England figures show that in July consumers paid back more than they borrowed for the first time since records began. Lending to non-financial companies fell too – by a record 1.7% on the month.
What the commentators said
“The hatches have been well and truly battened down,” said Brian Murphy of the Mortgage Advice Bureau. Consumers are clearly “retrenching like never before”. That’s good news on balance, said Damian Reece in The Daily Telegraph. If growth is to be sustainable in the long term, both consumers and companies need to get debt under control.
But while this makes sense for individual households and companies, it undermines overall economic activity, said Norma Cohen in the FT. If households and businesses don’t borrow, they don’t spend and invest. The result could be a “downward spiral in demand and prices”. Charlie Bean of the Bank of England calls this “the paradox of deleveraging”.
And while consumers and firms are cutting back, banks certainly won’t be inclined to boost lending significantly anytime soon, said Vicki Redwood of Capital Economics. No wonder: Bank of England figures show that write-offs on non-financial corporate debt jumped by 40% quarter-on-quarter between March and June. This is a reminder that while the losses on toxic assets are largely over, “recession-related losses on conventional loans… are only just beginning to come through”. Weak lending will “act as a severe constraint” on the recovery.
Another constraint that will kick in before too long, due to spiralling public debt, is higher taxes and spending cuts, said Ruth Lea in The Times. With both the private and public sector going “cold turkey” after years of debt addiction, it’s “hard to see where the drivers for buoyant growth will come from”. The worry now, as Angela Monaghan put it in The Daily Telegraph, is that we are in for a “fitful recovery at best”.