According to Bank of England (BoE) governor Mark Carney, business investment is being delayed by uncertainty around the future relationship between this country and its European partners. Consumers are also adjusting to the squeeze on real incomes after sterling’s decline. On the other side of the coin, profitability has remained strong and capital costs are low. Overall, the BoE revised down in early August its forecast for full-year output growth from 1.9 per cent to 1.7 per cent.
What of the much-discussed credit crunch? It is easy to conflate the central bank’s prudential work to ensure lenders aren’t being reckless with a general bearishness about the UK economy. But, as Mr Carney had been keen to point out last month: “This is not what’s driving the economy. It’s an issue for a subset of borrowers and a subset of lenders.” In general terms, consumers are responding to sterling’s fall by reining in spending, not ramping up borrowing: consumption growth is expected to move in line with income growth. Just 1.25 per cent of borrowers have debt service requirements that are more than 40 per cent of their income, Mr Carney said, compared with 2.5 per cent of borrowers five years ago.
There were few signs of the expected turn in the credit cycle in lenders' interim statements. Ten years on from Northern Rock’s demise, the theme of the major retail lenders’ half-year results was the higher capital levels on show, driven by regulation. HSBC (HSBA) ramped up its share buyback programme and RBS (RBS) continued to hack at its risk-weighted assets. At buy-to-let mortgage specialist Aldermore (ALD), a bump in its capital buffer means a maiden dividend is in sight.
But Brexit uncertainty and the household income squeeze were enough to encourage challenger bank Secure Trust (STB) to turn off the taps on higher-risk lending such as sub-prime motor finance, having previously got out of unsecured personal loans. Concerns that primary contract purchases are propping up values and sales in the new car market were reflected in the cautious outlook at retailer Lookers (LOOK), further weakening the company’s already low valuation on results day, in a sector that is under stress.
If the wider consumer credit sector is to shift, look to early 2018, when the term funding scheme, and its predecessor the funding for lending scheme, come to an end. Access to easy funds has helped protect lenders’ margins as they grow. Without it, some banks may have to scale back their loan book growth, if they can’t push up rates to offset the rise in funding costs.
Growing unsecured lending is a worry, with £270bn in total debt (at end-2016); but UK mortgage lending saw £245bn borrowed in 2016 alone. Total mortgage debt is around £1.3 trillion, according to the Council of Mortgage Lenders. It’s the largest such market in Europe, and there is a fair amount of doubt over its prognosis.
Terrible half-year results for Countrywide (CWD) and Foxtons (FOXT) reflect industry disruption and a tough comparator in last year’s rush to beat the stamp duty changes. But the decline in turnover on the secondary market is a deeper, longer-term problem. If limited supply is keeping prices higher, the concern is that an economic turn for the worse could see the floor removed. There was a tellingly strong reaction to a story – quickly rejected by the government – that the Help to Buy scheme could be scaled back or replaced before its scheduled end in 2021. Again, all eyes are on the punch bowl.
The divergent financial calendars of the general retailers means we do not get a clear comparable picture across the first half, but recent profit warnings at DFS (DFS) and Dixons Carphone (DC.) suggest, at least in part, the effect of that real income squeeze on the high street. At the same time, Mr Carney has also been clear that historically high employment, coupled with weaker inflation, could help lessen that squeeze. The second half is already shaping up to be a fascinating one.
Ian Smith is companies editor
