The temptation this week is to focus on last week’s big rise in unemployment and whether it changes the outlook. The subject has had a good going over, but let me deal briefly with it.
Essentially, unemployment rose by a record 281,000 in the March-May period on the Labour Force Survey (LFS). The claimant count, in contrast, showed its sharpest rise back in February and has had progressively smaller increases since then, including “only” 23,800 in June.
It suggests the job-market picture has been getting better — or less worse — as do some of the surveys produced independently of the Office for National Statistics. The LFS, based on a survey of 60,000 households, on the face of it suggests things have been deteriorating rapidly.
One view is that the difference between the two measures is explained by redundant City and other high-salary people not signing on. Another is that the government is pulling out all the stops to get people off the claimant count.
I don’t think, however, we need either of these explanations because the difference is largely a statistical illusion. The LFS measures average unemployment in the March-May period compared with December-February, and showed a rise of 13% between the two.
Using the same approach for the claimant count, there was an 18% rise between the two periods, reflecting the fact that average unemployment for March-May was pushed up sharply by the huge monthly increase, 136,600, in February. If this is right, reading across from the claimant numbers, there will be a smaller quarterly rise in LFS unemployment in April-June and, if the improvement in the claimant count continues, we should see smaller increases in the second half of the year, though the impact of summer school and college leaving is awaited.
We will have to wait for that, but what I want to talk about this week has been one of the questions most put to Charlie Bean, the Bank of England’s deputy governor, on his “quantitative easing tour” of Britain. This won’t be remembered as long as, say, the Rolling Stones’ Bridges to Babylon tour (1997-8), but Bean is to be congratulated for taking the message out to the country.
The question put to the deputy governor, particularly by smaller firms, was: when are the lending taps going to be turned on? It is a question Alistair Darling, the chancellor, intends to ask the banks when he invites them to 11 Downing Street shortly.
It is also one of the central questions for the economy in the coming years put last week by the International Monetary Fund in its annual assessment of the economy. Is the banking system big enough and strong enough to support a recovery, or will any upturn founder on a lack of credit?
I have mentioned before the historical precedents for recoveries from financial crises being subdued because they are “creditless” — credit growth does not pick up for several quarters after the economy has turned. Is this the outlook facing Britain?
We know Britain has suffered a serious loss of lending capacity. In the mortgage market this means a loss of wholesale funding that, in the first half of 2007, provided funds for 60%-70% of new mortgages.
For business lending, the big effect has been the withdrawal of foreign banks from the British market. Between 2005 and 2008, they contributed nearly half of the rise in business lending. Now they are not providing any, at a time when British banks, while insisting they are doing their bit, are also severely restricting their lending.
The banks are an easy target, particularly when the bonuses start flying round, but it is easy to forget how close to death some of them were a mere few months ago. That means, while business would like them to be going a lot faster, a gentle jog is all they can manage. A record low Bank rate, now reflected in very low money-market rates, does not help them greatly if the only funding at those rates they can get is very short term. Retail banking margins and profitability are being squeezed, in spite of appearances to the contrary.
So despite all that taxpayer support, with various schemes running into hundreds of billions of pounds, the banks are still convalescing. That is why UK Financial Investments, the body responsible for managing taxpayer stakes in banks, says it will take years to sell them off.
The Bank set out some of the fragilities in its recent Financial Stability Report. The “funding gap” of big UK banks — the difference between customer loans and deposits — continued to rise after the crisis broke and on Bank estimates was £800 billion last year. That gap has been filled in large part by government support but the Bank warned this cannot continue indefinitely.
“The leading UK banks might need to shrink their balance sheets or find alternative sources of funding of around £500 billion over the period to 2013, as various forms of public-sector financing are progressively withdrawn,” the Bank said.
You might ask why the government cannot just keep propping up the banks until funding markets return to normal. Perhaps they will between now and 2013. But the Bank is concerned that an open-ended taxpayer commitment to the banks could hit the UK’s sovereign debt rating.
It is not hard to avoid the conclusion, then, that banking in Britain is likely to remain seriously impaired for some time. On top of the loss of capacity from the withdrawal of foreign players, British banks are facing severe balance-sheet pressures. Deleveraging — reducing debt — will be a priority for them in the years ahead.
It is not all bad news. So far, the effect of taxpayer support, and possibly quantitative easing, has been to prevent bank lending growth turning significantly negative, as has happened in previous banking crises in other countries, and in Britain in the secondary banking crisis of the 1970s. Firms that are able to do so are accessing funding in other ways, through equity and bond issues, which is one reason why the investment banks, which get fees from such issues, are doing so well. Venture-capital firms, some of which have done very little business in the past year or so, have pools of cash ready to invest.
The latest Deloitte survey of chief financial officers shows that credit availability for larger firms has improved for the second successive quarter but that companies are not looking to banks for finance. Equity is currently the most popular form of finance, bank borrowing the least, exactly the opposite of the situation two years ago.
We still need bank lending, however, and smaller firms in particular need it to survive the recession and expand into the recovery. For them, the continued problems at the banks are their problems too.
PS: Readers keep asking me what my skip index is saying and I can’t keep it from them any longer. The index has tracked the recession pretty well. Ahead of the big autumn downturn, it was holding up at two (skips in the street), pointing to trend growth in the economy. Then it plunged to zero, staying there all winter, until some friendly yellow skips reappeared around Easter.
So far, however, there has been no follow through, with the index stuck at one, suggesting the worst of the downturn may be over but that there is no convincing sign of recovery.
I have been directed towards another informal indicator, Google searches for the terms “Jobcentre” and “benefits”. Both rose sharply during December last year, remained very high over the winter, then slipped a little but have remained essentially flat since then.
Scotland leads the way in such searches, followed by Northern Ireland and Wales. Proportionately, people in the south of England are half as interested in finding their local Jobcentre as those in Edinburgh. That must tell us something, though I’m not sure what.
Originally published at David Smith’s EconomicsUK blog and reproduced here with the author’s permission.