Flatlining Britain: How Broken Lending is Choking the Economy

There were two bits of economic data that landed yesterday morning. The first was October’s GDP numbers, which tell us how much the UK economy grew—or didn’t—during the month. The second was GfK’s long-running consumer confidence index for December, giving us insight into how consumers feel about their wallets and the wider economy. Put the two together, and we get a rather murky picture of where we stand—and where we might be heading.

And the results were pretty bloody glum. The UK economy contracted for the second month running in October, shrinking by 0.1%. If November’s figures also come in negative, we’ll officially be in a recession. Not that this is a new trend—the UK economy has been stuck in a decade-long flatline. This latest contraction comes from sluggish activity across most sectors. The powerhouse services industry didn’t move, with consumer-facing businesses like pubs and retail struggling. Manufacturing and construction fared worse, posting declines of 0.6% and 0.4%, respectively.

The ONS pointed to one key reason behind October’s dreary numbers: pre-Budget uncertainty. Starmer and Reeves spent weeks warning of fiscal black holes and broad shoulders. The result? Businesses and consumers hit the brakes, and UK PLC collectively ‘bricked it.’ Real estate and accountancy saw a brief rush to complete deals ahead of Budget Day, but that sort of chaos isn’t how you run a functioning economy. Lesson learned: opposition rhetoric doesn’t cut it in government—you need a plan.

There are slight rays of light. GfK’s consumer confidence index edged up two points to -17 in December (still ugly, but marginally better than the month previous). Forecasts for personal finances even tipped into positive territory compared to last year, suggesting that wage rises and stabilising costs might be calming the waters. That said, expectations for the broader economy over the next 12 months remain firmly pessimistic, at a gloomy -26. It’s a tentative turning point, but the jury’s still out.

The grocery sector, for one, is surprisingly upbeat about Christmas. Shoppers are ready to splash out on festive food and home-based celebrations. Pandemic-learned habits—cooking at home and entertaining indoors—still dominate spending, keeping grocery tills ringing while pricier items like cars and gadgets languish on the back burner.

This all demonstrates that so many issues around the economy are based on confidence. In 2024 the number of housing transactions are expected to hover around the 1 million mark, in 2023 that number was even lower at around 800,000. To put this in perspective it taken nearly two years to sell the amount of homes normally sold in a in a good single year. Its a massive slump and it matters. Big-ticket purchases—whether kitchens, cars, or gadgets—rely on the psychological and financial security tied to home equity, the 21st-century equivalent of cash under the mattress. With the housing market in a rut, people aren’t tapping into that equity, and without that flow of spending, the broader economy struggles to gain momentum. Until the housing market picks up—and homeowners feel confident enough to spend—we’re likely to see the wider economy stuck in low gear.

The London property market is showing signs of life. Prices are up 2% annually, a modest but welcome bounce after years of re-evaluation, but it’s not enough. Reeves and Starmer think that all this will be solved by building more houses and building alone. But it’s about far more than purely supply. Labour needs to stimulate demand as well, and that means tackling the archaic and restrictive lending system the housing market is locked into.

At the heart of the issue is how lending works in this country. The Bank of England essentially dictates the interest rates at which individuals borrow, creating a one-size-fits-all approach to risk. Back in the day, your local bank manager knew you, your background, and your circumstances. Risk was personal, negotiated between lender and borrower. Now, we’re stuck with algorithms, buckets of risk, and blanket base rates.

All this means that mortgage rates are determined by the risk level of the entire UK economy, rather than individual circumstances. The businesses and individuals that the economy needs to inject cash into to foster growth are starved of the low-interest funds they deserve, and growth is restricted. Meanwhile, high-risk prospects gain access to borrowing at rates they shouldn’t qualify for. This allows such businesses to persist in a zombified state, effectively sleepwalking the economy into zero growth.

The Bank of England’s base rate shifts the responsibility for risk from banks to the state. It represents the worst kind of socialism, disguised as economic orthodoxy. Banks no longer assess individual risk, nor do they take responsibility for it; instead, the BoE applies macroeconomic considerations uniformly. This is capitalism without accountability. The state is effectively enabling banks to profit while assuming limited risk on their behalf. This must change.

Risk assessment should return to the individual level. High-risk borrowers should face higher rates, while low-risk borrowers should benefit from lower ones. This isn’t to say that macroeconomic considerations should be ignored entirely, but they shouldn’t dominate to the exclusion of all else. The housing market needs to be liberated from this state-controlled interest rate model. The Bank of England should act as the master of risk, not the backer of lending.

For now, the road to recovery remains as foggy as the weather. The Bank of England isn’t expected to lower rates anytime soon, though a softer approach might emerge by 2025. But it’s ridiculous that the economic foundation of the country is tied to such a nonsensical model of economic governance. The lending system needs to be liberated, but I’m not holding my breath. Rachel Reeves’s well-publicised connections with the Bank of England mean she’s not the person to lead such revolutionary thinking. And that all means the future for the economy looks flat… very, very flat.

A Message from TheArticle

We are the only publication that’s committed to covering every angle. We have an important contribution to make, one that’s needed now more than ever, and we need your help to continue publishing throughout these hard economic times. So please, make a donation.