Duncan’s Economic Blog

Project Merlin: The first signs aren’t good

Posted in Uncategorized by duncanseconomicblog on May 9, 2011

Two months ago the Treasury published the details of its ‘Project Merlin’ agreement with the banks.

For me, looking at the economic issues rather than those around pay, the key failing of Merlin was the inclusion of gross, rather than net, lending targets. As I wrote at Left Foot Forward:

First the agreement is for gross lending rather than net lending – i.e. it only refers, it takes no account of repayments on existing loans. It would be perfectly possible for banks to issue gross loans of £190bn but fund this by calling in old loans. What matters for the UK is not gross lending but net lending.

The coalition agreement (page 9 of the pdf) emphasised that net lending targets could be introduced to ensure that banks lend to small and medium sized businesses:

“We will develop effective proposals to ensure the flow of credit to viable SMEs. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.”

This now seems to have been abandoned. As business secretary Vince Cable commented less than a year ago:

“This would be completely letting the banks off the hook. It’s perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses.

“Even if they have a gross target, what assurances do we have that it will be enforced, because the banks have been running rings round the Government so far?”

This looks like a climb down from Vince Cable and a victory for the banks.

Last week we got the first official data that lets us see how far the banks are living up to their promises on lending. The Bank of England’s latest ‘sectoral breakdown’ of money holdings and lending was released on Wednesday.

The key figures for this purpose are lending to PNFCs (or private non-financial corporations – i.e. normal, non-financial businesses). In March, post-Merlin, sterling net lending by UK banks to these businesses fell by £1.4bn. In addition foreign currency net lending  by UK banks fell by an additional £1.1bn.

We have no data on what happened to gross lending (the Merlin target) in March, but we can say that net lending fell by £2.5bn.

It doesn’t look like Merlin has got off to a great start.

(The above uses the monthly ‘sectoral breakdown release’. The latest Trends in Lending, a more detailed report, was published in late April, but most the data only runs until the end of February, so I decided it wasn’t fair to use as indicator of Merlin progress. This release does contain a lot more data and the next edition (in July) will be an important release)

An excellent post and some gloomy economic news

Posted in Uncategorized by duncanseconomicblog on May 9, 2011

Sorry for the (very) light blogging over the past 10 days, normal service will be resumed tomorrow.

But here are a few things that have caught my attention over the past week.

First – An excellent post by Gavin Kelly & Matthew Whittaker of the Resolution Foundation.

They ask whether the OBR is correct – will households really borrow to maintain living standards?

Despite all the frothy rhetoric about the ‘re-balancing of the economy’ the growth of household consumption will be absolutely pivotal in the resumption of steady growth. Indeed, the key factor determining the strength of theUKrecovery will be the uncertain reactions of millions of households, who are already close to the edge, to further falls in disposable income. The question of whether ever more personal debt can be used to fill the growing living standards gap deserves far more serious scrutiny than it has received to date.

I’ve blogged on similar issues asking if household savings really will fall.

Second –UK economic data over the past week has been troubling.

Survey data tells us that that construction, manufacturing and services have all slowed. According to Markit, who compile thePMI data, say the current results indicate second quarter growth is on track to be around 0.4%.

Income Data Services say that median pay deals are running at 2.5%, well below inflation and signaling a continuing squeeze in living standards.

The NIESR have cut their 2011 growth forecast again, it is now down to 1.4%.

Corporate insolvencies are on the rise.

There is some good news – better numbers from Morrisons and Next may indicate some strength in retail sales and mortgage approvals (a good indicator of consumer confidence) have ticked up a little.

However what does seem clear is that the OBR is looking increasingly out-of-line with other forecasters. A further downgrade to their 2011 growth forecast should be expected.

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