Slowing UK lending, factories signal hard road ahead

Lending to British consumers fell in August and manufacturing activity shrank in September, weighing on prospects of a sustainable economic recovery in the coming months.

Many economists reckon Britain exited recession in the third quarter, rebounding after an extra national holiday in the previous quarter and helped by sales of tickets for the London Olympics and Paralympics.

But Monday's figures highlighted the risk that the economy may falter again.

Mortgage lending dropped by 276 million pounds last month, Bank of England data showed - the sharpest decline since December 2010 and wrongfooting economists, who had expected a rise. Approvals numbered 47,665 against an expected 49,000.

A key measure of activity in the manufacturing sector, the CIPS/Markit Purchasing Managers' Index (PMI), fell to 48.4 in September from August's upwardly revised 49.6, dipping further below the 50 mark that separates growth from contraction.

"The main conclusion from what we've seen in recent months is the underlying economy still looks fragile," said RBS economist Ross Walker. "We're going to see a bounce in Q3 GDP, but if we look towards 2013 the numbers are not particularly encouraging."

The third quarter marked the first decline in business in nine quarters for British financial firms, according to a survey by the Confederation of British Industry and PriceWaterhouseCoopers.

Sterling fell against the euro after the PMI data, which reinforced views that the Bank of England will add more stimulus once its current 50 billion pound round of government bond purchases is completed in November.

The run of data also signaled a slow start for a BoE scheme launched on August 1 to revive lending to both homeowners and businesses.

"(The) data suggest that the introduction of the Funding for Lending Scheme (FLS) has not produced significant immediate results in improving the growth or price of credit to households and businesses," Citi economist Michael Saunders said.


Britain's economy has not fully recovered the output lost during the 2008-2009 financial crisis and slipped back into recession in late 2011. The government's austerity drive and the euro zone debt crisis have been weighing on demand.

The PMI survey showed that manufacturers cut production for the third month in a row and new export orders declined for the sixth straight month in September, with demand from Asia and the European Union weakening.

Parallel surveys for the euro zone showed Britain's largest export market suffered an even steeper fall in activity, pointing to a new recession. ID:nL9E8G1026]

The UK central bank and the government are hoping that consumers will step in and spend more once lower inflation eases the squeeze on their budgets.

But Monday's BoE data pointed to a continued reluctance to take on more debt.

Consumer credit fell by 134 million pounds in August, while total lending dropped by 410 million pounds - the steepest decline since July 2010.

The central bank's latest credit conditions survey showed that banks want to make more mortgages available as a result of the FLS.

But BoE data also showed effective interest rates rose in August for new secured and unsecured consumer lending.

(Additional reporting by David Milliken, editing by John Stonestreet)