Credit pull back ‘cannot last’ without damage

Outstanding loans to businesses and for households to buy homes has continued to contract, prompting a leading economist to question whether the economy can prosper without more credit.

Central Bank figures showed that net lending to Irish businesses had fallen by the end of May by €1.7bn on an annual basis.

And net mortgage lending contracted by €458m in the year, as more people paid down their home loans at a faster pace than the banks had advanced new mortgages.

The figures also showed that consumer loans increased but at a pace that probably reflects the pickup in the economy.

Meanwhile, the value of deposits held by households and businesses at Irish lenders increased in annual terms, according to the Central Bank figures.

Alan McQuaid, chief economist at Merrion Capital, said that as the economy continues to grow that the contraction of bank loans “cannot last much longer” without damaging the economy.

Lenders continue to be cautious for a number of reasons, he said, including regulatory controls, the caution of consumers, and because small firms have been put off by the cost of credit.

“Bank have got their hands tied to some extent; consumers are still shy of taking out new loans and for SMEs the cost of credit is too high,” Mr McQuaid said.

“You have to look at how the economy is booming without credit. But it (the contraction of lending) can’t last,” he said.

“The bottom line is that credit will need to flow at a much stronger level than currently if the economy is to grow to its full potential over the long-run.”

He said that Irish SMEs appear to be suffering because unlike large companies they cannot tap very cheap financing.

Official surveys show that Irish small businesses pay some of the highest costs for their loans in the eurozone.

The Central Bank figures show that both households and businesses have increased the amounts of deposits held at Irish banks.

Lenders hold €8.8bn more in deposits from Irish households than the amount they have loaned to households – a dramatic turnaround from 10 years ago when household loans towered above household deposits by €72.6bn.

Philip O’Sullivan, chief economist at Investec Ireland, said that Irish businesses have experienced a sharp decline in their debts since the financial crisis and net business loans will likely start to increase next year.

He predicted money tied up in equity funds will be released.

On consumer loans, Mr O’Sullivan said that increases in consumer loans appear to reflect the strengthening consumer confidence, with more people at work helping to boost additional consumer spending.

The Central Bank said that consumer loans exceeded repayments by €162m in the three months to the end of May.

Consumer loans include car loans, furniture and holiday loans, overdrafts and credit cards, it said.

Despite the significant challenges that many Irish firms face from the fallout of Brexit, most forecasters predict that consumer spending will rise this year,

Earlier this month, the Economic and Social Research Institute forecast “solid” GDP expansion of 3.8% this year and 3.6% in 2018, as employment picked up broadly across regions and by sectors.


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