SME Access To Finance Survey: 2019

3. Macroeconomic context and recent trends in lending

3.1 Macroeconomic context

This section gives a brief overview of the state of the Scottish economy when the SME Access to Finance Survey 2019 fieldwork was undertaken. It does not reflect the subsequent shock to the economy as a result of the global Covid-19 Coronavirus pandemic which took hold after the survey fieldwork was completed.

The 2019 survey was conducted during November 2019-January 2020, by which time the Scottish economy and financial markets had recovered from the 2007/08 financial crisis and subsequent global recession. The survey was conducted following a period of fairly stable economic growth. However, growth was modest, reflecting weaker global growth and prolonged Brexit uncertainty from the UK's exit from the EU which was impacting business investment, sentiment and output.

During the fourth quarter of 2019, when much of the survey fieldwork was carried out, the Scottish economy grew by 0.2 per cent in real terms, following growth of 0.3 per cent in the third quarter of 2019.^[22] Compared to the same quarter last year (2018 Q4), Scotland's GDP had grown by 0.7 per cent. The equivalent growth rates for the UK as a whole were broadly in line with Scotland.^[23]

Source: Scottish Government: Scotland's GDP, First Estimate for Quarter 4 2019

At the time the survey fieldwork was undertaken, Scotland's labour market was performing strongly compared to historic records, despite softening slightly over the year.^[24] Over the period November 2019 to January 2020, the employment rate in Scotland was 74.9 per cent, an increase of 0.4 percentage points on the previous quarter and a decrease of 0.4 percentage points on the same quarter on the previous year.^[25] The unemployment rate remained low at 3.5 per cent, down 0.2 percentage points on the previous quarter and up 0.1 percentage points on the same quarter of the previous year.^[26] The labour market had improved since the last SME Access to Finance Survey in 2012, when the unemployment rate was around twice that at the time of the 2019 survey.

Source: Scottish Government: Labour Force Survey

Evidence from the Scottish Government's National Accounts shows that business investment was weaker in 2019 relative to the prior year amid ongoing uncertainty surrounding the UK's exit from the EU and the underlying risk of a no-deal Brexit. Business Investment has increased steadily since the time of the last survey in 2012, but has slowly declined over the past three years. In 2019 Q3, business investment grew by 1.3 per cent on the previous quarter but contracted by 4.4 per cent relative to the same quarter in the previous year.^[27] Business survey intelligence^[28] reported that business investment and confidence levels remained weak in the final quarter of 2019.

A detailed narrative on the state of the Scottish economy at this time can be found at: https://www.gov.scot/publications/state-economy-february-2020/

3.2 Recent trends in lending to businesses

This section provides an overview of recent trends in lending to businesses in Scotland and the UK as a whole up to the period the survey fieldwork was undertaken to provide context to the survey results.

UK

The impacts of the 2007/08 financial crisis and subsequent recession still affect financial markets to this day. Over the past decade, the Bank of England has kept interest rates low to aid recovery.^[29]

Source: Bank of England Database

The annual growth rate of net lending to UK businesses, which saw a sharp decline at the height of the financial crisis is no longer negative, however growth has not returned to pre-recession levels.

Source: Bank of England Database

The overall value of lending to SMEs has also declined over time.^[30]

Source: UK Finance

The relatively low growth in net lending and decline in overall lending levels in recent years can partly be attributed to an increase in the amount of debt that businesses are repaying. Whilst the value of repayments from UK businesses exhibits volatility, there is evidence of a gradual increase in repayments following the financial crisis. The value of repayments was higher in 2019 than in 2012, when the last SME Access to Finance Survey was conducted.

Source: Bank of England Database

Evidence from the Bank of England's credit conditions survey^[31] indicates that there was a fall in both the demand and supply of corporate lending over 2019 Q4. In 2020 Q1, while supply was unchanged for businesses of all sizes, demand from small businesses decreased slightly while demand from medium-sized businesses increased.

Spreads^[32] on lending to SMEs have narrowed (improved) since the last SME Access to Finance survey in 2012, indicating that the cost of credit to businesses has reduced. However, relative to the period 2013-16, spreads have widened (worsened) somewhat for medium-sized firms in particular. Looking specifically at the two quarters over which the survey was undertaken, spreads on lending to small firms tightened slightly in 2019 Q4 and remained broadly unchanged in 2020 Q1 while spreads had widened for medium-sized businesses over both quarters.

Source: Bank of England, Credit Conditions Survey

Scotland

Since 2012, when the last SME Access to Finance Survey was undertaken, the value of new loans to SMEs in Scotland broadly increased although it declined somewhat over 2018. Since 2015 Q2, net lending (the value of new loans less loan repayments) was, for the most part, positive for SMEs as a whole.

However, net lending was consistently negative for small businesses, with repayments exceeding new loans taken out. The value of new loans to small businesses in Scotland fell over 2018 and 2019. In 2019 Q4, the value of new loans taken out by small businesses was down 38 per cent on 2017 Q3, when the value of new loans was at their highest over the period shown.

Source: UK Finance

In terms of the overall value of lending to SMEs, while there was more fluctuation in Scotland than in GB (see above), overall lending to SMEs in Scotland declined over the period 2014-17 before picking up somewhat in 2018 and then remaining broadly stable.^[34]

Source: UK Finance

Independent market reports suggest that lower levels of lending in recent years were a result of falling demand for finance amongst SMEs rather than issues around supply.^[35] Prevailing economic conditions affected both business confidence and appetite for borrowing, while political uncertainty and Brexit negotiations added an additional level of uncertainty. SMEs appeared to be increasingly avoiding debt as a way to mitigate risk in the current climate.

The value of current account credit balances and deposit account balances of SMEs increased substantially over 2017-2019.^[36] Greater cash reserves allow businesses to self-fund more easily without the need to call on external funds. The low-interest rate environment may also have encouraged some businesses to put more personal funds into their business rather than into low-interest saving.

Evidence suggests that there has been growth in alternative lending in recent years, in particular to SMEs, with the emergence of peer-to-peer lending and crowdfunding.^[37] This has partly been driven by the decline of high street bank operations, which has allowed new suppliers to operate largely without any local market operations and work almost exclusively via phone and internet.