Home' Trinidad and Tobago Guardian : August 15th 2013 Contents BG28 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 2013 • WEEK THREE
If good timing is a gift, Britain s chief central
banker is a talented man. Mark Carney, the
Canadian picked to run the Bank of England
for the next five years, left his home country
on a high. Since he took office in July the
British economy, for so long in the doldrums,
has looked much bouncier.
So far, Carney s judgment seems as sound
as his luck. His first big move---a commitment
to keep interest rates low at least until unem-
ployment falls to seven per cent---will ensure
that Britain s economy continues to grow. That
is a good start. But Carney s big challenge is
to get credit flowing to Britain s firms. Failure
will put the recovery and his own reputation
A sunny bundle of numbers certainly sug-
gests that Britain s economy is on the mend.
Surveys that measure consumer confidence
show shoppers are feeling positive: vital in an
economy in which consumption makes up
two-thirds of spending. Surveys suggest man-
agers purchasing plans are at record highs
across construction, manufacturing and serv-
Much of the upswing comes from better
news on housing. Prices are rising across the
country. Mortgage costs are lower. Britons
with a big deposit can now borrow at 1.5 per
cent; even those on higher loan-to-value ratios
have seen rates plunge. With interest payments
down, disposable income is up. That explains
the rosy outlook of shoppers and rising con-
sumption. Since real estate agents, lawyers
and banks make up a decent chunk of services
output, it also helps explain why managers in
the service sector are feeling optimistic.
The question is how long it will last. Interest
rates are one pitfall. With good news in the
bag and more expected, central bank watchers
have been wondering when official rates might
rise. The fact that inflation is above the bank s
two per cent target fuels the view that a rate
increase is justified.
But this kind of chatter becomes self-ful-
filling: When investors begin to worry that
rates will rise, the yields on government bonds
tend to go up. Since these yields set a floor
for borrowing costs, interest rate uncertainty
can lift the rates on mortgages and corporate
debt, even if the central bank has not done
This is why Carney has followed the Federal
Reserve and the European Central Bank in
offering "forward guidance." His commitment
to keep official rates at 0.5 per cent until at
least 750,000 people are back in work aims
to strip uncertainty from the system. With
unemployment forecast to fall slowly, that
could take until 2016, perhaps longer. Special
"knockout" clauses allow Carney to put a rate
rise back on the table if inflationary pressure
builds or if markets look unstable.
Such clarity is welcome. Britain is not ready
for higher interest rates. A depressing 11.5 mil-
lion Britons are jobless, with 2.5 million of
them actively seeking employment. Many of
those who are working are part-timers who
would gladly work longer hours.
And it is not just the labour market that
has slack. Both the manufacturing and con-
struction sectors are still more than 10 percent
below their 2008 peaks. With this level of
spare capacity, a bout of growth is unlikely to
lead to runaway inflation.
Indeed, the big risk is that an unrelenting
credit crunch for businesses snuffs out growth.
The latest data show household lending is just
0.3 per cent below its 2008 peak. But lending
to firms is 22 per cent lower.
Accounting for inflation, the drop is more
like 32 per cent, and the decline is accelerating.
In January, lending to businesses was falling
at an annualised rate of three per cent. By
June, the pace had more than doubled to seven
Some of the credit cutbacks are a natural
response to companies past excesses. Com-
mercial property firms borrowed on a whim
in the mid-2000s. But while the party was in
one sector, the hangover has been widespread.
Credit to the manufacturing sector has been
cut sharply, with lending to firms that make
chemicals and electronics 30 per cent lower
than the peak. In fashion and food, the crunch
has culled 39 per cent and 47 per cent of
loans. None of these was a particularly bubbly
Loans let firms bridge the gap between
investing in the business and making sales;
they finance outlays on machines that must
be made before revenues can rise. The crunch
explains why Britain s rate of new-firm creation
is oddly low, and why business investment
has fallen 34 per cent in five years.
Britain s investment-to-gross domestic
product ratio was a dreadful 159th in the world
in 2012. Its research and development spending
puts it toward the bottom of the rich-world,
Powerful forces underpin the business-credit
squeeze. Banks are cutting costs to raise share-
holder returns. Since commercial loans require
time-consuming scrutiny of business plans,
they are costly to extend.
Granting mortgages from a call centre is far
cheaper. Lenders also need to boost capital
levels: Banks must hold up to four times more
capital against business loans than against the
safest residential mortgages. A daft new gov-
ernment-subsidy programme---Help to Buy---
further encourages mortgage lending by pro-
viding banks with insurance against default
for borrowers with small deposits.
To offset these forces, Carney should do
more to make corporate lending more attrac-
With the mortgage market in good health,
the Funding for Lending programme that gives
banks access to cheap money should be
restricted to those that provide fresh loans to
firms. The programme could also cover more
of the outstanding business loans on banks
books. A really radical Carney would buy up
pools of business debt. Any of these steps
would free up lenders balance sheets.
These ideas are not without risk. By buying
or holding more volatile assets the central
bank could end up losing taxpayers money.
But inaction carries bigger risks.
Britain s house prices are rising again, and
household debt is starting to swell. This is
sustainable only if workers future wages justify
the mortgages granted against them. They will
not if Britain stays on a path of low investment,
poor productivity and weak wage growth.
Carney may have left Canada at just the
right time, for its housing market is widely
seen as frothy. If he fails to help put Britain s
economy on a more sustainable path, he risks
gaining a reputation as a central banker who
only knows how to pump up housing markets.
@2013 Economist Newspaper Ltd. (Dis-
tributed by the New York Times Syndi-
How is it really doing?
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