Calls for Cheaper Loans to Boost Confidence among UK SMEs
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Calls for Cheaper Loans to Boost Confidence among UK SMEs

The Government and the Bank of England are being called upon to support SMEs with cheaper business loans and support to open up new export markets. This comes amid signs of a dip in business confidence for the first time in two years.

Exports Flat

Recent data from manufacturers, together with consumer confidence indicators, show that the UK economy may be slowing down, hurting many small and medium-sized companies that have barely begun to feel the positive effects of the previous two years’ upswing. A survey earlier this month by the Confederation of British Industry (CBI) shows that export orders are largely flat, with output growth in the previous quarter primarily driven by domestic demand. This reflects the fact that the UK economy is growing more strongly than its key export markets.

The latest UK Confidence Business Monitor (BCM) by the Institute of Chartered Accountants in England and Wales (ICAEW)/Grant Morrison also shows a modest slowdown in economic growth, with skills shortages posing an increasing challenge to more UK companies. The BCM Confidence Index stood at +32.3 this quarter, compared to +37.3 in Q2 2014 – the first decline in two years.

While the UK economy is still expected to expand – by 0.9% – in Q3 2014, the pace of growth is likely to slow in the final quarter of the year. Growth in employment looks set to continue and could lead to over half a million new private sector jobs in the next 12 months. However, despite this strong job creation, wage rise expectations remain muted. Stephen Ibbotson, the ICAEW’s director of business, said:

“The imbalances in our economic recovery that were masked by rising confidence continue to persist – exports remain weak and investment isn’t maintaining momentum. We look to the Bank of England and the Government to work harder to ensure that the recovery is placed on a broader footing before we see this still relatively high optimism erode.”

Credit Crunch Continues for SMEs

Analysts argue that SMEs – numbering nearly 5 million in the UK – are still suffering a credit crunch that is harming their ability to grow. The drought in bank lending is as much about regulation as it is about perceived risk, with banks now required to hold more capital as security against business loans. This has made borrowing more expensive for small and medium-sized companies. While overall net lending increased in the three months to May, according to the latest Bank of England “Trends in Lending” report, SMEs saw small business loans drop by £200 million in the same period.

Lawrence Sacker, a partner of accountants UHY Hacker Young, said: “While things are slowly starting to improve in the UK, it is not enough to kick-start the growth in capital investment by businesses that we need to see. The Government and Bank of England need to consider what else they can do to lower the cost of business loans to SMEs.”

Slowdown in Growth

The recent slowdown in the rapid growth witnessed in the first half of 2014 has led to speculation that the Bank of England will resist raising interest rates until early next year. Earlier this month, the Bank’s monetary policy committee (MPC) voted to keep rates unchanged at 0.5%. However, two members of the nine-strong committee voted for a 0.25% rise, a break in the ranks after three years of unanimous votes. The split vote increased speculation that an interest rate rise could come sooner than expected.

According to Samuel Tombs, senior UK economist at Capital Economics, “The minutes of August’s MPC meeting, revealing the first split interest rate vote since July 2011, indicate that a 2014 rate hike cannot be ruled out. But the low inflation outlook suggests the odds are still in favour of a delay until early next year.”