Economists pessimistic on growth

UK economists are getting increasingly pessimistic on growth as a whole host of new data emerged today on the 'poor state' of public finances.

Worryingly for markets, the public sector net borrowing remains high at £14.7 billion despite attempts by Conservatives to cut borrowing, whilst net cash requirements rose to its highest level since April 1984.

"June's UK public finances figures put a bit of a dent in hopes that the fiscal position is now on a clearly improving trend." said Jonathan Loynes at Capital Economics, "Along with an upward revision to May's deficit, June's borrowing total of £14.5bn left a cumulative deficit in the first three months of the year of £40.3bn, only a fraction below the £40.9bn figure recorded in the same three months of last year."

The news was also greeted with disappointment from Howard Archer, Chief economist at IHS Global, "Indeed, the Public Sector Net Borrowing Requirement was an eye wateringly high £14.5 billion in June," he said, "Although at least this was marginally down on the £14.7 billion shortfall a year earlier."

Both are worried that month-on-month spend exceeds the Government's plan for spending this year - which OBR, the independant body, has already forecast - and which currently looks to overshoot by £3 billion.

"Admittedly, this would be a very small overshoot compared to those seen in recent years." said Jonathan Loynes, Capital Economics.

UK Industrial output meanwhile appears on the other hand to be doing well.

After the CBI's manufacturing survey was released today, outlook at first appears to be good with the survey revealing that "output rose at the fastest rate in 15 years in the three months to July".

In all, the Confederation of British Industry reported manufacturers seeing a rise in output over the last quarter - a rise of 24 pct on the previous quarter driven by both home-grown and export-led demand.

"The CBI industrial trends survey for July is generally encouraging and suggests that the manufacturing sector should enjoy a decent third quarter after much improved expansion in the first half." said Howard Archer.

"However, manufacturers are less confident about future prospects, with the output expectations balance for the next three months falling back to +6 in July from +15% in June and a peak of +17% in May."

Howard's views follow a gradual acceptance that the industrial recovery is slowing. Albeit whilst enjoying a boom - perhaps in the same way that retail sales have been enjoying a surge during the warmer weather and World Cup:

"The quarterly survey also shows that orders are expected to rise at a reduced rate over the coming three months (+5% versus +20% in the April survey), with the export orders expectations balance deteriorating to -3% from +18% in April." said Howard.

"In addition, the business optimism balance in the quarterly survey softened to +10% in July from +24% in April."

"July's CBI industrial trends survey is a blow to hopes that a strong upturn in the external and industrial sectors will help to offset the impact of the coming fiscal squeeze." added Jonathan Loynes at Capital Economics.

"Not only did the key monthly output expectations balance fall (6 vs. 15 in June), but the quarterly business optimism balance also dropped from +24 to +10, the lowest level since last October."

"Perhaps most disappointingly, though, all of the balances relating to exports weakened markedly, suggesting that the previous falls in the pound are still have very little positive effect on the external sector." he added.

Despite the reduced optimism on Industry, most economists were generally surprised by M4 Money Supply and a boost in mortgage lending.

M4 - the Bank's gauge of sterling in circulation - rose to +3.0 percent vs. 2.9 percent expected.

The Bank of England would also have been boosted by news that mortgage lending according to the Council of mortgage lenders, which cover 94 pct of the market - that found an estimated £13.1 billion gross, lent in June, although figures for this quarter are still no higher than last year.

"Our gross lending estimate of £13.1 billion in June represents a seasonal pick-up and is higher than June last year." said CML economist Paul Samter.

However, both business and consumer lending were 'dissected' by IHS Global Insight's Howard Archer who found £2.3 billion decline in net lending to business, whilst consumer lending remained lacking.

"Furthermore, the major banks reported that their net lending remained weak in June" added IHS Global's Howard Archer, who was reading from the Bank of England's 'Trends in Lending'.

Meanwhile, mortgages which are a factor in sustaining housing prices were down 3,000 between May and June "thereby matching the equal lowest level since May 2009" he said.

The reason for the decline remains unknown as supply has overwhelmed demand although the General Election may have added to uncertainty for buyers, however most economists are worried over 'tight lending conditions'.

The Bank of England said last month in its bi-annual 'Financial Stability' report that the key to holding back the economy from going into recession again was a combination of Bank's lending and interest rates remaining low.

Whilst the latter remains under the monetary policy committee the other remains in the hands of the banks themselves and the BoE encouraged them to increase capital that it could sustain more lending.

The result leaves both the BoE and the Government with a headache - without an exports-led recovery, without strong industrial growth going forward and a possibility of lending conditions remaining 'tight':

"The Bank of England Trends in Lending Report for July reveals several worrying traits and reinforces concerns over tight credit conditions...very much maintains concern that tight credit conditions could hold back the recovery." concluded Howard Archer, IHS Global Insight.

"This keeps open the possibility that the Bank of England could yet revive Quantitative Easing. However, we believe that this will only happen if the economy shows serious signs of faltering over the coming months." he added.

Analysts at RBS agreed pointing out that access to credit remained weak through 'tougher lending conditions' that was stiffening the market.