Mixed signals on UK business borrowing and investment

Mixed signals on UK business borrowing and investment

June 22, 2023

The latest figures from UK Finance on business finance and from the Institute for Public Policy Research (IPPR) on investment have left pundits wondering where the UK economy is headed.  Positive as some aspects of the UK Finance statistics may be, they still give some cause for concern. By contrast the IPPR numbers are unambiguously poor.

Appetite for funding

UK Finance was pleased to report that loan and overdraft applications and approvals picked up in Q1 2023, but in a sign of the hangover from the uncertainty of 2022, gross lending by the main high street banks in that quarter fell to a post-pandemic low of just £3.7bn. At the same time, the strong growth in 2022 of invoice finance and asset-based lending facilities seems to have stalled. Even if IF/ABL lending did go up by 9%, that is the slowest since mid-2021.

Use of overdraft facilities

The percentage usage of overdraft facilities is edging up, rising in Q1 2023 to 48% by comparison with 46% throughout 2022, although there are some telling sector variances. Use of facilities by hospitality SMEs jumped a third in Q1 2023, reflecting the challenging conditions in that industry.

Decumulation of deposits

UK Finance reported declining deposits across all sectors, once again with hospitality seeing the largest negative impact. Overall, deposits were down by 5% by the end of Q1 2023, the largest quarterly drop since the pandemic, leaving total deposits at the lowest level since August 2020. Nevertheless UK businesses, especially SMEs have retained a reasonable level of headroom in their cash and borrowing resources.

Debt repayments

Loan reductions had been on a declining trend throughout 2022 and continued to fall away in Q1 2023. UK Finance have put a positive gloss on this, suggesting that this reflects the growing number of Coronavirus loans which have been fully repaid, but it may also be the result of tightening cash generation as profitability is impacted by rising costs. With corporate insolvency volumes soaring in May 2023 to a new record monthly high, there is clearly rising pressures on businesses.

Business investment

With the driver for the last period of strong GDP growth neutralised as cheap labour resources has dried up for UK businesses, most economists are looking wistfully at the business investment record of many of the UK’s major competitors, particularly within the G7.  The clear consensus is that without strong investment, sustained economic growth is unachievable.

Dr George Dibb, head of the IPPR’s Centre for Economic Justice said:

“Currently, the UK is experiencing a debilitating case of investment-phobia, and the government’s aversion to investing to seize future opportunities is stopping us from getting out of the growth doom loop we find ourselves in.”

The IPPR’s have reported that the UK fell to the bottom of the G7 league table for business investment in 2019 and that it has fallen further behind since the pandemic. The slump means Britain’s economy has missed out on making £350bn of private sector investment between 2005 and 2021, compared to other G7 countries.

As well as coming last among the G7, the IPPR report also found that the UK now ranks twenty-seventh out of the 30 OECD countries for business investment. Britain is now worse for business investment than every other developed economy apart from Poland, Luxembourg, and Greece.

The reasons behind this parlous state of affairs are much debated, but certainly include:

  • High taxes
  • Red tape
  • Crumbling infrastructure
  • Lack of skilled labour resources
  • Escalating interest costs

What now for UK businesses?

The probable avoidance of a recession has undoubtedly been a boost to confidence, which may underly the rise in funding applications and approvals. Continued caution on deploying those resources for investment is understandable.

We still live in uncertain economic and commercial times, where strong financial discipline is essential and risk-taking should be subject to rigorous assessment before any commitments are made. The road ahead remains bumpy.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.