SME lending demand can provide an important indication of business confidence and future investment, particularly because small and medium-sized companies play a significant role in employment and economic growth. When these businesses reduce borrowing, it can signal that companies are delaying expansion, capital expenditures, or other investments because of uncertainty about future economic conditions.
The Bank of England’s credit conditions survey for the fourth quarter of 2016 presents a mixed picture. Credit availability remained broadly stable and household borrowing increased, but demand for corporate lending weakened among small and medium-sized businesses. The decline comes as companies continue to assess the economic implications of Brexit and determine whether conditions justify additional investment.
The Bank of England released its quarterly credit condition survey results today (covering Q4 2016) and indications are mixed, with credit availability about the same as the previous quarter, household credit usage up but generally soft demand for corporate borrowing. The main concern was the lack of demand in the small-to-medium enterprise (SME) sector, a typically key indicator of potential economic growth.
Overall demand for corporate lending from small and medium-sized companies fell significantly in the fourth quarter. Demand for small companies is expected to decline further this quarter, but medium-term companies expect a small increase.
The good news here is that after a large decline in loan demand by large companies in Q3 2016, at least that sector remained unchanged in Q4. Smaller companies of course might seem to be naturally hesitant to expand business investment in the wake of Brexit, and could be waiting to determine whether indeed the actual exit will take place. This is reflected in the lack of capital investment.
The main concerns will again focus on the corporate sector and the risk of further weakness in investment, which will undermine the longer-term growth outlook unless companies are able to generate higher rates of cash flow, which reduces the need for borrowing to fund expansion.
The decline in SME lending demand is significant because borrowing by smaller businesses is often closely connected with plans to invest, expand, purchase equipment, or hire additional employees. When companies postpone these activities, the effects can extend beyond individual businesses and influence the broader outlook for economic growth.
Brexit-related uncertainty may be contributing to that caution. Small and medium-sized businesses have fewer resources than many large corporations to absorb unexpected economic changes, making them particularly sensitive to uncertainty surrounding investment decisions. Delaying borrowing until the direction of the economy becomes clearer can therefore represent a practical response to an uncertain business environment.
The stabilization of borrowing demand among larger companies provides some reassurance following the substantial decline recorded in the previous quarter. However, continued weakness among smaller businesses could remain a concern if it translates into lower levels of capital investment over an extended period.
Future Bank of England credit conditions surveys will provide additional insight into whether the decline represents a temporary response to uncertainty or the beginning of a more persistent trend. A recovery in SME lending demand could indicate improving business confidence, while continued weakness could suggest that companies remain reluctant to commit resources to expansion and longer-term investment.
Overview by Steve Murphy, Director, Commercial and Enterprise Advisory Service at Mercator Advisory Group
