Mixed messages herald better times

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Bank of EnglandI've made no secret of my controversial opinion that we're heading into a brighter economic spell, with good times ahead for our stock markets. A few reports out today give us mixed signals, but at least we didn't get the near total negativity we'd have had six months ago.

Bank lending fell...

One piece of news is that, according to the Bank of England (BoE)'s latest Project Merlin figures, overall lending by the UK's five main banks fell in 2011, with an overall 3% net fall in the fourth quarter of the year. That's not what the government wanted when it went ahead with its quantitative easing programme, and its lending targets have so far not been met. But few really expected much better.


At the same time, research conducted by the Federation of Small Businesses showed that only 10% of the companies surveyed took loans from their banks in 2011, and that only around a third of them used their overdraft facilities. While a low loan rate might support difficulties in borrowing cash, the high number of businesses not using their overdrafts does suggest some degree of voluntary restrictions on taking on debt -- companies are less likely to actually want to borrow money when they think economic conditions are not yet right for expansion.

...Or it rose

In contrast to the BoE's figures, Ernst & Young's Item Club reckons that overall bank lending rose by 4.3% last year, but has forecast a fall in bank lending of 2.2% in 2012, with loans to small- and medium-sized business falling by 5.7%.

Interest rates on sub-£1m loans are apparently around twice the rates on £20m loans, reinforcing the suggestion that the current lending regime is hostile to smaller businesses.

But the Item Club expects lending to be heading back upwards in 2013, if only a little.

Mortgages up, for now

In another key economic area, the housing market, loans to first-time buyers are apparently up, as the current 1% stamp duty holiday is set to end in March. According to the Council of Mortgage Lenders, the number of first-time buyer mortgages in December was 14% up on the same month of 2010, and 7% up on November's figures.

The total number of mortgages, however, apparently fell by 6% in 2011. That's really not a surprise, as the boom in buy-to-let and self-certified mortgages has clearly ended. And that's a good thing, too, as far too much money had been lent to far too many people who couldn't afford it.

Although the first-time buyer rise is almost certainly boosted by the return of stamp duty, it's still good to see. And (despite my owning an investment property, which I have had for 20 years), I hope it will presage a new era in which houses are considered things to live in rather than a get-rich-quick scheme -- and I'd like to see them priced more as a useful asset than as an investment.

Further recession?

One of the fears surrounding the future of the housing market is the lingering one of a double-dip recession, which would most likely lead to further falls in lending. But is it actually going to happen? The Confederation of British Industry (CBI) thinks not.

For this year, the CBI is forecasting growth of 0.9%, with 2% estimated for 2013, and that we'll beat the arbitrary definition of recession (that is, two consecutive quarters of falling production) by posting growth of 0.2% for 2012 Q1.

In contrast to that, accounting and services firm BDO argues that output is continuing to fall, and the Chartered Institute or Personnel and Development believes that unemployment is set to rise.

What does it really mean?

But you know what? All this micro-forecasting is self-serving nonsense, and half a percent either way really doesn't matter. Even historic economic growth is notoriously hard to measure, and past periods are constantly being rerated as more actual information comes in. In fact, we can often see the historical record being readjusted by far more than the 0.1% accuracy that forecasters delude themselves into thinking they can achieve.

In the long run, it matters not whether a quarter's output rises or falls by 0.2%, because such figures are simply too precise to be meaningful against the background of random noise that causes everything to fluctuate.

What difference will it make if we "officially" slip into recession in the first quarter of this year by a fraction of a percent, or avoid it by the same margin? In real terms, none at all. But it will have the headline writers out in force, exaggerating the importance of it whichever way it goes (and quietly forgetting to re-examine their words when the figures are repeatedly readjusted in the light of future hindsight).

How's your glass?

But for long-term investors, all this uncertainty and the arguing about the status of containers holding 50% of their maximum capacity is great stuff. As I saw someone put it recently:

"Dear Optimist and Pessimist,

While you guys were busy arguing about the glass of water, I drank it.

Sincerely,

The Opportunist."

For rational opportunists, we've never had it so good.

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