April 3, 2013 / 1:36 PM / 5 years ago

UK small business lending stagnant, construction contracts

LONDON (Reuters) - British small business lending remained stagnant and the construction sector shrank again, data showed on Wednesday, reinforcing a downbeat outlook for growth as the Bank of England holds its April policy meeting.

Boosting lending to smaller businesses is an important goal for the government, while sharp falls in construction output were largely responsible for the economy shrinking in late 2011 and early 2012, and threaten to tip Britain back into recession.

However the central bank has been sharply split for the last two months over whether the right response is to restart its purchases of government bonds, or try other measures.

Wednesday’s data is unlikely to shift the debate too far, but shows the challenges facing the Monetary Policy Committee.

Markit/CIPS construction PMI data turned out weaker than expected. The monthly survey of purchasing managers rose to 47.2 in March from 46.8, suggesting the sector contracted again but not as sharply as in February.

Markit, which compiles the survey, said unusually cold weather combined with sluggish demand kept a lid on construction work in March.

“It seems highly probable that the sector suffered renewed and appreciable contraction in the first quarter of 2013 after all too rare expansion in the fourth quarter of 2012,” said Howard Archer, chief UK economist at IHS Global Insight.

A PMI survey for the service sector in March due out on Thursday will give a clearer sign of whether Britain’s economy as a whole avoided its third recession in less than five years, having already contracted in late 2012.

A separate survey by the Bank of England showed British banks preferred to lend to home-buyers and big companies rather than small businesses during the past three months, and intend to do the same in the months to come.

The availability of mortgages and business loans more generally was forecast to expand, but at a slower pace than earlier in the year, banks said.

More than five years on from the start of the financial crisis, the distribution of bank lending is a politically and economically sensitive issue in Britain.

In the middle of last year the central bank and the government launched a scheme to boost lending and reduce interest costs, but it has had mixed success.

“A strong possibility is that the Funding for Lending Scheme will be adjusted to specifically favor banks that increase their lending to smaller companies,” said Archer.

The banks surveyed by the BoE said small businesses’ demand for lending dropped sharply in the three months to early March and banks were wary of the more risky loan applications.

Banks expected demand from both small and large businesses to improve significantly over the next three months, however.

They also said the BoE’s Funding for Lending Scheme had reduced their borrowing costs and the premium they charged for mortgages and for lending to both large and small companies.

This was the first fall in loan spreads for small businesses since the survey started in late 2009, though banks said they were cutting rates for larger firms more sharply.

Additional reporting by Olesya Dmitracova and William Schomberg; Editing by Ruth Pitchford

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