UK: Deloitte Monday Briefing: Gauging The Outlook For Credit Growth

• The financial crisis shook the global banking system and drastically curtailed the supply of credit to consumers and companies. Global credit growth collapsed in 2009/10 and has subsequently continued to contract in the advanced economies.
• The damage inflicted by the crisis on banks and on their credit-creating capacity has cast a long shadow. Policymakers fret that a lack of bank credit could mean a sickly recovery. Historically credit-less recoveries have tended to be slower than ones accompanied by more vigorous credit growth.
• Regulators want banks to have stronger balance sheets to protect against the risks of future financial crises. The banks have responded by significantly raising the amount of capital they hold. But different banks operate in different economic and regulatory conditions and, as a result, the process of balance sheet repair has been uneven.
• Many banks have further to go in strengthening their balance sheets. The International Monetary Fund (IMF), for instance, recently noted that "full implementation of the Basel III standards will raise both the quantity and the quality of capital that banks have to hold".
• Credit growth in the US and Europe remains pretty anaemic. Lending to consumers is weak and, in Europe, lending to corporates continues to shrink. The exceptions are bank lending to US corporates, which has picked up strongly in the last two years and, a recent, modest revival in unsecured lending to UK consumers.
• Progress is being made in reducing risk in the banking sector. The LIBOR-OIS spread, a gauge of the health of the banking system, has narrowed markedly in the US, the UK and the euro area in the last 18 months. Investor sentiment about the banks has also improved. In the last 18 months, shares in euro area banks have risen over 70%.
• While current growth in credit is anaemic, surveys of banks in Europe and the US suggest things are past the worst.
• The Bank of England's latest Credit Conditions Survey shows UK banks are making more credit available to households and corporates at lower interest rates. The Federal Reserve reports that US banks have consistently eased credit conditions for corporates and commercial real estate lending since 2010. Even in the euro area, where the credit squeeze intensified in 2011-12, the European Central Bank reports signs of "a stabilisation in credit conditions for firms and households".
• Creating a more resilient and better capitalised banking system means that banks are likely to be more cautious about the amount of credit they provide to the economy than they were in the years before the financial crisis. That may be no bad thing. UK policymakers, for instance, probably do not want a repeat of the doubling of the stock of bank lending to UK households and corporates that occurred between 2000 and 2008.
• Our guess is that credit supply and credit demand will slowly improve. But tighter regulation and the legacy of the financial crisis is likely to mean safer banks and slower trend growth in credit. This is likely to be a world in which bank credit grows more in line with the economy, rather than far ahead of it.

MARKETS & NEWS

UK's FTSE 100 ended the week up 0.7%.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

• Weaker than expected jobs data for the US economy in January led to a rise in 'safe' assets such as bond prices, and falls in riskier equity futures
• Britain's export of goods hit a record high in 2013, with a greater-than-expected 1.9% rise in December sharply narrowing the trade deficit
• Shares in a number of American tobacco companies fell on news that the CVS Caremark chain of pharmacies is to stop selling tobacco products
• Greece's factory sector returned to growth for the first time in more than four years, according to purchasing managers data
• Irish consumer sentiment rose in January to its highest level since May 2007
• Spanish employment rose in January, for the first time since October 2010, boosted by stronger manufacturing data
• Japanese wages fell 0.2% in December, their 19th consecutive monthly decline, despite renewed government efforts to boost inflation
• Analysis by Thomson Reuters shows the biggest publicly traded companies in the UK set aside a record amount to settle legal costs in 2013, with banks in particular experiencing increased litigation and regulation
• New job vacancies in the City of London rose 34% in January month compared with a year earlier, according to specialist recruiter Astbury Marsden
• American beer sales fell 4.9% in January according to data from GuestMetrics, and fell the most in Colorado, where the legalization of marijuana has seemingly harmed alcohol sales
• British sportscar manufacturer Aston Martin is to recall 18,000 cars, after discovering that a part made by a Chinese supplier contains counterfeit materials
• Rating agency Standard & Poor's cut its outlook on Turkey's debt to 'negative' from 'stable', citing increasing risks of a "hard economic landing"
• The FT reports 'that the UK governments 'Behavioural Insights Unit', which uses psychology to try to change public behaviour, is expected to be the first of many policy teams to be privatised
• Average real wages in the UK will not return to their 2009 peak until 2020 according to analysis by the National Institute of Economic and Social Research (NIESR)
• California-based toymaker Mattel announced worse-than-expected quarterly earnings, with fewer sales of Barbie dolls and Fisher-Price infant toys
• The US Postal Service narrowed its losses in the quarter to December, with revenues boosted by a surge in online shopping and package delivery
• Shares in Twitter fell almost one-fifth following the release of the firms' first earnings announcement
• Sales of artisan breads have increased 8% across the UK in the last year, according to research firm Mintel, apparently driven by the craze for gourmet toast at boutique cafes – slice of success

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