Why Britain won’t have a ‘creditless recovery’

British bank lending growth has hit a brick wall. It doesn’t matter what Alistair Darling or Mervyn King say, bankers don’t want to lend us more money. The chart below from Bloomberg sums it up:

Graph: annual rate of growth in lending to British households

It shows the annual rate of growth in lending to British households – in green, now just 2.2% – while the mauve line tells the sorry tale of year-on-year ‘growth’ in household spending. As you can see, the latter has gone right into reverse. And history tells us it won’t pick up until the bank manager becomes more amenable.

But maybe it doesn’t matter. Some think that the UK just might have a “creditless recovery”. Kevin Daly at Goldman Sachs argued last month in the Wall Street Journal that because of low interest rates, the absence of easy credit won’t matter. That’s because consumers and companies are getting money from another source – their mortgage payments have fallen, while companies who have loans indexed to Libor (the interbank lending rate) have also seen interest costs fall. In other words, no one needs to borrow more because their existing lending costs have fallen so far.

It’s a nice idea. And “creditless recoveries” have been seen before, both in the UK and abroad, says Vicki Redwood at Capital Economics. Trouble is, it doesn’t look likely this time.

Why? Because although consumers might have more disposable income for now, rising unemployment, and rising taxes, will take a big bite out of that. Meanwhile, although some quoted firms have been able to raise money on the stock market via rights issues, much of this will be used to pay down debt or be “eroded by further falls in profits”.

And the public sector, overspent as it is, is in no position to blow even more taxpayers’ money. It all points, says Redwood, to a “sluggish and protracted recovery”. And that’s why we’d still rather stick with neglected defensive stocks which are less vulnerable to economic ups and downs, than buy into the cyclicals which have driven this rally.