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OPINION

Lending blow to growth hopes

Lending blow to growth hopes
July 31, 2014
Lending blow to growth hopes

This matters because weak lending has often been associated with low capital spending; both were weak in the early 2000s; a brief rise in investment in 2006-07 was accompanied by rising lending, and both slumped in 2008 and have been depressed since. These numbers therefore cast doubt over the Bank of England's forecast that business investment will rise 11.7 per cent this year.

The lack of borrowing probably owes more to a shortage of perceived investment opportunities than to banks' reluctance to lend. A survey by the CBI last week found that only 3 per cent of manufacturing firms said an inability to raise external finance was a constraint upon their investment plans, compared to 47 per cent citing uncertainty about demand and 37 per cent inadequate net returns.

Capital spending could rise strongly without a rise in borrowing if firms run down their cash instead; non-financial firms have £296.6bn of sterling bank deposits in the UK, equivalent to over two years of capital spending. But these deposits are growing at their fastest annual rate since 2007, implying that firms are becoming even keener to accumulate cash. And it would be a nice coincidence if the most cash-rich companies just happened to have the most profitable investment opportunities. More likely, if firms invest simply because they have the cash, the spending might not prove very profitable.