You know the UK's problem? It's fresh out of credit

Government should forget about quantitative easing and empty rhetoric. Business need to start borrowing again in order for the UK economy to recover, says Steward Baird, partner at UK VC Stone Ventures.

by Stewart Baird
Last Updated: 25 Jan 2013

So there you have it. We're a hair's breadth away from doing something the UK economy has never done before, namely succumb to a triple-dip recession.

But was this latest contraction in the economy (a 0.3% fall in the last three months of 2012) really that big a surprise? Not when you consider that the economy is being strangled at source.

There are countless reasons why the economy is once again in the red but the fact that our SMEs, which are the engine room of the economy, just aren't getting the oxygen — namely credit — they need to grow, is a big one.

A couple of weeks ago, the Bank of England published a report that showed lending to business by the high street banks has deteriorated sharply in the past three months.

It was already bad, of course, but now the lack of funds getting through to business, especially smaller businesses, is startling.

We hear a lot about how the Funding for Lending Scheme is increasing the availability of new mortgages but it's not, as yet, benefiting SMEs. They have been starved of credit for years now and nothing has changed since the late summer when the scheme launched.

In any case, it's not cheap money that the economy needs to spark, it's money in the right places. The right places are high-growth businesses, but those high-growth businesses are struggling to find the capital to grow.

As long as this dearth of credit continues, I just can't see how the economy will pull itself out of the rut it is in. Until smaller businesses can access funds, the economy will flatline at best.

The problem is that, unless companies have significant assets and security, the high street banks won't go anywhere near them. Even decent companies with a solid track record can sing for it. And if SMEs can get credit, the terms are often so punitive that they decide not to proceed.

The irony is that while everyone else can see what the economy needs, the Bank of England seems blind to it. Many economists have already priced in more money printing on the back of this latest gloomy dataset. To date, of course, quantitative easing has been wholly ineffective, but Threadneedle Street seems fresh out of ideas.

In the months ahead there's every chance we'll see a reversal in the decline in unemployment. Inflation could also rise further on the back of the weak Pound. The economy, and the UK's treasured AAA rating, are now genuinely on red alert.
Even the growth of the alternative finance sector, a rare ray of light in the economy, cannot hide the fact that these are highly challenging times.

Unless credit starts to flow, and soon, the economy could haemorrhage.

Stewart Baird is partner at Stone Ventures

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