The credit crunch continues

We are still experiencing a crunch in credit - when will it end?

The financial crisis, which began in 2007, is often described as the "credit crunch". The evidence, however, is that the crunch in credit only really began in 2009 and shows no sign of abating.

For many the financial crisis became real when queues of depositors were filmed outside Northern Rock on 14th September 2007. However, Bank of England credit data reveals that the credit crunch really began in the middle of 2009 and in a very dramatic fashion. It was then that many sectors of the British economy witnessed such a dramatic fall in credit that nearly three years on credit levels remain significantly below their peak.

Credit in many sectors fell off a cliff edge in the second quarter of 2009 after years of continual growth. The sectors in the table above all witnessed dramatic falls in credit in the middle of 2009, although real estate saw a more pronounced fall about a year later.

What is even more worrying is the fact that, in many sectors, credit levels have continued to fall.

The data in table 2 begins where that of table 1 finished and gives bimonthly credit figures from March 2011 to March 2012. Credit in these four key sectors has continued to fall. Of most concern are the falls in credit to manufacturing and financial intermediation firms. The manufacturing sector produces the majority of Britain’s goods exports and firms in this sector rely on credit to invest in capital. Furthermore, trade credit helps firms reach foreign markets. The fall in credit to firms involved in financial intermediation is both a symptom and a cause of the problem and is evidence of the weaknesses that continue to plague the British banking system.

The final table indicates the severity of the credit crunch. Interestingly the crunch that began in the middle of 2009 was of a similar magnitude to the contraction in credit since the end of 2010. The data suggests that, far from the crunch relaxing, it continues and with previous falls the problem is compounded.

The picture is not the same for all sectors; lending to individuals secured on the value of property or similar asset has returned to, and in fact risen beyond, pre-crisis levels. The hotels and restaurants sector did not witness a significant fall in credit during the crisis. Nevertheless credit constraints continue to affect many important sectors of the British economy and there is little indication that this situation will change any time soon. Given this, it is hard to argue that the worst is behind us.

What time is it? Time to make it easier to get credit. Photograph: Getty Images

Selling Circuits Short: Improving the prospects of the British electronics industry by Stephen L. Clarke and Georgia Plank was released yesterday by Civitas. It is available on PDF and Amazon Kindle

Photo: Getty Images
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I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.