The key chart
Contribution to total growth (ppt) plotted against share of total loans (%) (Source: BoE; CMMP)
The key message
Weakness in financing flows to UK SMEs (see, “How can UK SMEs invest in growth and job creation (II)?”) reflects broad-based, negative growth across all sectors or industry groups. While focusing (correctly) on addressing the challenge of inflation, policy-makers should remember that investment and business development matter too.
Every SME sector or industry group saw YoY declines in their outstanding stock of loans in August 2023. The largest decline was in recreation loans (-16% YoY), the smallest in real estate loans (-3% YoY). The total outstanding stock of SME loans fell by 8% YoY.
The trade, construction and real estate sectors were the largest contributors to this negative growth. They contributed -1.5ppt, -1.4ppt and -1.1ppt to the total -8% YoY decline respectively. These dynamics illustrate clearly the bias towards real estate – the smallest absolute decline but the third largest contribution to the total slowdown – and, to a lesser extent towards trade and construction.
Lending to these three sectors dominates SME lending in the UK. Collectively they account for just under half of the total SME loans, with the real estate sector accounting for 41% of total SME loans alone.
- Real estate: monthly flows have been negative every month since February 2023. More importantly, the cumulative 12m flows that had turned positive in the 12m to January 2023, have been negative since then. Further confirmation of the changing fortunes in the wider real estate sector.
- Wholesale and retail trade: monthly flows have been negative since October 2022. Cumulative 12m flows have been declining consistently since then to reach -£1.8bn in the 12 months to July and August 2023.
- Construction: monthly flows have been persistently negative. Cumulative net flows remain negative at -£1.8bn in the 12 months to August 2023 but “less negative” than the -£2.1bn flows in November 2022, December 2022 and January 2023.
SMEs’ access to finance is systemically important to the UK economy. The broad-based weakness in lending across all sectors or industry groups is concerning and supports the wider hypothesis that SMEs are currently putting both investment and business development on hold. The influence of real estate also indicates that the bias towards less productive FIRE-based lending in the UK extends into the vital SME sector too.
“Looking behind the negative financing flows to UK SMEs?”
Trends in net lending flows to UK SMEs (Source: BoE; CMMP)
The persistent weakness in lending to the UK SME sector described in “How can UK SMEs invest fully in growth and job creation (II)?”, and illustrated in the chart above, reflects broad-based, negative growth across all sub-sectors or industry groups.
Annual growth rates in lending (% YoY) broken down by sector (Source: BoE; CMMP)
Every SME sector or industry group saw YoY declines in their outstanding stock of loans in August 2023 (see chart above). The largest decline was seen in the case of recreation loans (-16% YoY), the smallest in real estate loans (-3% YoY). The total outstanding stock of SME loans fell by 8% YoY.
The only exception here (and an important one!) is a sub-sector within real estate lending. The stock of lending for “buying, selling and renting of own or leased real estate”, which accounts for 31% of total SME lending, rose 1% YoY in August 2023.
Contribution to total growth (ppt) plotted against share of total loans (%) (Source: BoE; CMMP)
The trade, construction and real estate sectors were the largest contributors to this negative growth. They contributed -1.5ppt, -1.4ppt and -1.1ppt to the total -8% YoY decline respectively (see chart above). These dynamics illustrate clearly the bias towards the real estate sector in particular – the smallest absolute decline but the third largest contribution to the total slowdown.
Individual sector share (LHS) and cumulative share (RHS) by sector (Source: BoE; CMMP)
Lending to the real estate, trade and construction sectors dominates SME lending in the UK. Collectively these three sectors account for just under half of the total SME loans, with the real estate sector accounting for 41% of total loans alone. Once again, the UK’s skew towards less-productive FIRE-based lending is evident in the case of SME lending.
Trends in net lending flows to real estate (Source: BoE; CMMP)
Monthly flows to the real estate sector have been negative every month since February 2023 (see chart above). More importantly, the cumulative 12m flows that had turned positive in the 12m to January 2023, have been negative since then. Further confirmation of the changing fortunes in the wider real estate sector.
The negative growth contributions of the trade and construction sectors reflect both the size and lending dynamics of both sector. Both sectors account for 9% of total loans and both saw their outstanding stock decline by 15% YoY in August 2023. Only the much smaller recreational sector saw a larger YoY decline.
Trends in net lending flows to wholesale and retail trade (Source: BoE; CMMP)
Monthly flows to the wholesale and retail trade sectors have been negative since October 2022 (see chart above). Cumulative 12m flows have been declining consistently since then to reach -£1.8bn in the 12 months to July and August 2023.
Trends in net lending flows to construction (Source: BoE; CMMP)
Monthly flows to the construction sector have been negative every month over the period shown. Cumulative net flows remain negative at -£1.8bn in the 12 months to August 2023 but “less negative” than the -£2.1bn flows in November 2022, December 2022 and January 2023.
Conclusion
SMEs’ access to finance is systemically important to the UK economy. The broad-based weakness in lending across all sectors or industry groups is concerning and supports the hypothesis that SMEs are currently putting both investment and business development on hold. The influence of real estate also indicates that the bias towards less productive FIRE-based lending in the UK extends into the vital SME sector too.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.