Can business lead the recovery?

 
A builder works on the roof of a new residential property in north London The government has promised to guarantee mortgages using taxpayers' cash

Economic recoveries led by private-sector investment are few and far between.

Companies, for understandable reasons, tend to wait till they see a consistent pattern of rising demand from customers before they embark on ambitious plans to expand capacity and hire lots of new people.

Which is why the weakness of the UK's disproportionately large consumer economy and the eurozone - Britain's largest export market, if regarded as a homogeneous whole - has meant growth in business investment has been significantly lower since the crash of 2008 than the government hoped (or, more precisely, than its Office for Budget Responsibility forecast).

History shows that retail-spending recoveries tend to lead economic recoveries, not investment revivals (which lag economic revival).

That is the respectable motive for the Treasury's attempt to revive the housing market, with taxpayer guarantees promised in the budget for £130bn of mortgages, in the sense that precedent indicates it should revive housing-related spending by consumers - although there is controversy about the strength of a link between general retail spending and house-price rises.

The UK may have become too dependent in the boom years on retail expenditure that was in part fuelled by an unsustainable housing boom. And this flaw in the UK's economy may have been recognised by the chancellor and prime minister. But the government now takes the view - as shown by its actions - that a flawed, unbalanced recovery is better than no recovery.

And indeed it is striking that as George Osborne fends off criticism from the International Monetary Fund that he is not doing enough to steer the British economy from the doldrums, part of his defence appears to be that the IMF hasn't noticed the mortgage-guarantee scheme and the £12bn contingent liability the Treasury has said it will take on to protect banks from losses, should financially overstretched homeowners fail to repay their mortgages.

Shoppers in Leeds city centre Firms are unlikely to expand until the High Street recovers

Of course it is not certain that a mini housing boom, if it materialises (not certain) would revive retail spending in the supposedly desirable way: although households have been saving more since the crash, they remain burdened by near-record debts. Many want or need to rebuild the strength of their finances by spending less and, as today's Markit Household Finance Index shows, with wages stubbornly refusing to keep pace with inflation and benefit payments being constrained, most consumers feel poorer.

That said, there may be less squeezed times ahead, if the recent falls in oil and commodity prices are sustained.

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Mr Osborne sees the government as one of those riskier businesses whose access to affordable credit cannot be guaranteed”

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But what about the Funding For Lending Scheme (FLS), whose extension for an extra year (to 2015) and to a wider range of borrowers will be announced in the coming days?

Will that supply a kick to the UK's stalled recovery?

Well most businesses would say that it can't do any harm, if it increases the availability of loans to small and medium size businesses and cuts the interest rate they pay.

And here's the thing: businesses in general continue to repay their existing debts to banks faster than they take out new loans, according to the latest Bank of England figures.

This reflects two trends, which you've read about here a boringly large number of times.

Banks won't lend to the riskier businesses that badly want and need to borrow, even with the benefit of cheap FLS money from the Bank of England, because the credit risk remains with the banks and is not taken by taxpayers.

And stronger businesses are not desperate to borrow, and on balance would rather repay their debts, in the absence of a growing market for their goods and services.

So unless and until the British High Street and the economies of Spain, Italy, Greece et al are tickety-boo again, it is somewhat unlikely that British businesses as a collective will be adding new production lines or expanding into gleaming new offices.

So does that mean George Osborne has no levers to pull?

Well, at the risk of boring you witless, I would point to the one marked "infrastructure".

The government's critics argue that if private-sector enterprises can't or won't invest, he could and should do more on the Treasury's balance sheet. But the chancellor's riposte is that he is pulling the infrastructure lever as hard as those who lend to him will tolerate.

Or to put it another way, Mr Osborne sees the government as one of those riskier businesses whose access to affordable credit cannot be guaranteed, whereas others would wish him to be a tad more bold and (ahem) entrepreneurial.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

This column...

This column may be a bit quiet for a bit, because I am away from the office.

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  • rate this
    0

    Comment number 236.

    @20.Daffodiljar
    It's very simple:
    - Of every additional pound of wealth that goes to the top 1%, most of it ends up as investment, pumping up asset bubbles and creating more excess production. It barelly affects their consumption.
    - Of every additional pount of wealth that goes to the lower 50%, ALL OF IT goes to increased consumption.

    Too much inequality = too little consumption.

  • rate this
    0

    Comment number 235.

    Thanks Gordon Brown you have bankrupted my grand children.

    13 years of breaking the UK

    Labour is not working
    Labour has never worked
    Labour will never work

  • rate this
    0

    Comment number 234.

    So, remind us young Gideon, as you are supposed to be our Chancellor.....


    ....what did you promise us Project Merlin would do.......?????

  • rate this
    +2

    Comment number 233.

    Sticks and stones will break my bones
    But words will never harm me.

    The gnarled stick of poverty & the dense stone of idiocy haunt your children's future. Congrats on that debt / fantasy house price rise fueled spending spree in the early 2000s.
    To save you we all have to endure stagnation, boredom and a slow fail.
    Peter is getting a bit upset now, you better go and hide.

  • rate this
    0

    Comment number 232.

    Funding for Lending has been a disaster for those who have been prudent and saved and were the last people responsible for the recession. These people are now being paid the square root of bugger all interest on their savings.

    Bad move George.

  • rate this
    +1

    Comment number 231.

    remember our population is growing
    relative wealth should be measured as gdp per capita
    the boom of the 00,s was weaker than just gdp figures show
    and the recession is worse
    it is entrenched like the 30,s not late 70's early 80's
    entrenched weak demand
    not the supply shock of quadrupling oil prices
    without govt stimulus of demand
    more loans to firms will bankrupt them
    banks want to lend

  • rate this
    +1

    Comment number 230.

    Hundreds of thousands of (mostly PT) Public Sector jobs gone......



    .....the Govt, said it would leave room for the Private Sector to expand.....



    ....yet private sector business know until there;s some demand there's no point in investing to expand.....




    ....and so the economy continues to at best trundle along flat & more likely is still contracting......

  • Comment number 229.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 228.

    210.
    Idd and I will continue to send my 50 quid a month to the Children of Somaliland & implore any Government I vote for to increase foreign aid.
    1.5-2 million ppl, how many of those wee'd away their luck, spent with no save? I have been dirt poor when a child. If the children of these ppl learn one thing they will be better ppl. Their parents......... SHAME!

  • rate this
    0

    Comment number 227.

    which comes first the chicken (spending consumer) or the egg(business making goods)? If you have slow consumer spending you will have zilch sales revenue for business.
    We are falling over ourselves supporting businesses & keeping them afloat but the logic must be to support consumers, these are the people that pump prime the economy. Cutting wages increasing taxes is not the way to go.

  • rate this
    +1

    Comment number 226.

    Dumb and dumber.
    The one thing the Government has some control over :UKFI ... has reduced its loanbook by £2 trillion......no wonder the Economy has been in the doldrums.
    Meanwhile economic commentators talk about prudent lending being needed , when actually ANY lending is needed as the insanity of contraction is unsustainable.
    The drive to value assets downward and wages lower is nuts!

  • rate this
    +1

    Comment number 225.

    Project Merlin, FFL, it's all politician speak for keeping the banking status quo at the expense of savers and businesses.

    They are hoping the economy worm will turn and we can all return to pretending we have more money than we actually have.

    The whole basis of this pseudo-capitalistic system where the eleite become more elite and those at the bottom suffer even more is fundamentally flawed.

  • rate this
    +4

    Comment number 224.

    The government should try lending money directly to Funding Circle (P2P lender) to improve lending to small business, the banks are just using the monopoly money from the FLS to strengthen their capital and pay large bonuses to senior staff.

  • Comment number 223.

    All this user's posts have been removed.Why?

  • rate this
    +2

    Comment number 222.

    It's a pity so many here are terrified of anything which might be called socialism.

    The Americans don't have this problem, because they're American, so cannot be so labelled.

    So they bunged a massive subsidy at the Illinois car industry...

  • rate this
    0

    Comment number 221.

    PoorJaques @202
    "intolerable extremes"

    All societies cohere in some form of 'socialism' & all deploy labour for deferred gain (capitalism) & will come to shared appreciation of need & desire for both security & dynamism

    Our choice is between vain 'emulation of democracy' by frank or virtual dictatorships (always really by Mammon, fear & greed, to our ruin), or emulation of plurality by democracy

  • rate this
    0

    Comment number 220.

    Was Benteen's canteen full?

  • Comment number 219.

    All this user's posts have been removed.Why?

  • rate this
    +2

    Comment number 218.

    Let's see if I have this right ... Banks make a mess through sub-prime lending and we need to bail them out. Govt now require banks to retain more capital, just in case they manage to get in trouble again. Got it so far.

    Now we need banks to lend more ... so we give them more money.
    But here's the funny thing, they take the cheap cash, but seem reluctant to loan it out!

    Suckered again?

  • rate this
    0

    Comment number 217.

    Fight and die

    Merci

    Yourstick is on the net.

 

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