U.K. banks expected to see poor loan growth in 2012

March 10, 2012 at 3:51 pm

The Bank of England’s freshly released quarterly inflation report reveals that the UK gross domestic product (GDP) growth is expected to remain modest in the near future and unlikely to return to its pre-crisis level until 2013.

The report indicates that while households’ incomes are slowly recovering, the government’s budget cuts and tight credit conditions have lowered the confidence of households and businesses alike, which has in turn affected demand as economic uncertainty continues to loom.

UK GDP contracted by 0.2% in Q4 of 2011, in contrast to Italy and the Netherlands that both shrank by 0.7%, falling into recession in the last quarter.

According to the report, the gloomy outlook and fiscal consolidation by the government is largely due to external factors, namely the ongoing concerns about the solvency of several euro-area governments, noting that the single biggest challenge to domestic recovery is the absence of a unified policy response in the Eurozone. However, even if the Eurozone crisis could be resolved in the near future, there is likely to be an extended period of slow growth in Europe.

Meanwhile, the five largest institutional banks in the UK, including Barclays, Lloyds Banking Group and RBS failed to fulfill the governmental lending quota in 2011. The deal, referred to as Project Merlin, obliged banks to lend a certain amount of funds, especially to small and medium sized businesses in recognition of state aid during the crisis – a mark missed by over £1billion, from the total of £76 billion.

This has drawn a lot of scrutiny over how the government has handled the situation and this is likely to further curb borrowing by households in the UK as confidence in the sector is falling.

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