Government To Underwrite Loans 
Chancellor George Osborne will unveil plans to release up to £40bn in loans to small businesses when he delivers the Government’s autumn statement tomorrow.

Under one plan, the Government would underwrite banks’ borrowings so that they could pass on cheaper loans to companies turning over less than £50m. Loans would initially be for £20bn but this could be doubled.

Speaking on the Andrew Marr show yesterday, Mr Osborne said: "The basic idea of this national loan guarantee scheme is to use the fact that the government can borrow money very cheaply to help small businesses to borrow money more cheaply than they do at the moment."

"So the government will underwrite the loans the banks make to small businesses in order to cut the interest rates small businesses have to pay. This will help them with their cash flow, to retain their workforces and expand and invest."

Under the proposals, a company taking out a £5 million loan would be able to borrow at 4 per cent rather than the typical 5 per cent, a saving of £50,000 a year.

The chancellor will also propose that the government takes a stake in an investment fund with private sector investors to provide a source of credit or loans to medium-sized companies.

A third scheme would offer an alternative to traditional bank loans by encouraging firms to sell bonds, or company IOUs, to the market.

A treasury spokesman said: "We all know that the cost of finance for smaller businesses has risen following the financial crisis. It's a problem people have been trying to solve since 2008, which is why these new schemes are much more radical than anything that has gone before.

"They should be a game changer for credit for small companies by cutting the cost of finance and over time opening up new options for how it is raised."

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Growth Remains Unchanged 
Figures from the Office for National Statistics (ONS), published yesterday, show that UK economic growth remained at 0.5 per cent in the quarter between July and September of this year.

The ONS says output in the production industries increased by 0.4 per cent in the three months to September 30. And services output advanced 0.6 per cent, although output in construction fell by 0.2 per cent.

Some economists say that the growth is unsustainable and may be a precursor of a looming second recession. "Economic growth in the third quarter was driven by stock building and Government spending, neither of which is the basis for a sustained recovery," said Vicky Redwood, chief UK economist at Capital Economics.

And Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said “There is a good chance that we will see GDP fall in Q4 and the longer that the crisis in the eurozone remains unresolved, the greater the probability that we will suffer a full-blown recession in the UK.”

However, a Treasury spokesman said the UK economy was "not immune to the turbulence in the eurozone and its impact on British businesses" and that the Government was “using all levers to protect the UK economy.”

Earlier this week, the Bank of England’s Inflation Report warned that “the prospects for the UK economy have worsened” and suggested that growth will not exceed 1 per cent in either 2011 or 2012.

The report added that the growth outlook is “unusually uncertain” due to a lack of concrete action on the eurozone debt crisis. The Bank said the problems in the continent are the “single biggest risk” to the UK’s economic health.

The Bank has forecast that the economy will stagnate in the next three months of this year, and is likely to grow at between 0.7 and 0.8 per cent next year.

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MPC Puts Further QE Plans On Hold 
Minutes from the November meeting of the Bank of England’s Monetary Policy Committee (MPC) show that it has been decided not to boost the current £275bn package of quantitative easing (QE) any further until at least February.

The minutes said that there was “little merit in fine tuning” and that it will take “ a further three months” to complete the latest £75bn installment, voted for in October.

Since inflation remains “materially above target”, it appears that the Bank is concentrating on bringing it down to nearer the 2 per cent target, which might take longer than the two years it has been suggesting.

The minutes said: “it remained a possibility that (inflation) would be slower to fall during 2012 than the pace implied by the committee’s central projections.”

Reaction to the minutes from analysts was that they were much as expected. Philip Shaw of Investec said: “No huge surprises from the minutes. In particular the unanimous votes to keep policy on hold was as expected, but also that the committee seemed to dismiss the idea of increasing the quantitative easing target and stepping up the pace of purchases.”

And Vicky Redwood of Capital Economics said: “The vote showed that the new, lower set of inflation forecasts did not persuade any members to vote to increase the QE programme straight away, with the Committee voting unanimously to leave policy unchanged. But given that the extra purchases announced in October are not yet finished, that was not a surprise.”

While the committee’s nine members voted unanimously to leave QE on hold for the time being and for interest rates to remain unchanged at 0.5 per cent, it was split on the likelihood of more QE after February. However, most analysts expect this to happen.

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Fears Rising 
According to a Bank of England survey of risk managers, fears that the UK financial system could be about to experience a shock, such as another bank failure or the eurozone breakup, are at their worst since the collapse of Lehman Brothers in 2008.

The Bank's twice-yearly Systemic Risk Survey, conducted between 20 September and 21 October, shows that 88 per cent of respondents thought the probability of a "high-impact event" in the near future had increased.

Around 18 per cent of those questioned said that the risk of such a shock was "very high", up from zero in the first half of the year. Around 37 per cent put the risk as "high", up from 15 per cent.

The risk of a sovereign default and a return to recession were cited as the gravest dangers to financial firms by 76 per cent of respondents. A danger that banks would be unable to fund themselves in the wholesale capital markets was cited by 57 per cent.

Around 38 per cent pointed to the risk of new regulations and taxes, while around 26 per cent cited the risk of a financial institution failing. Fewer respondents cited the risk of corporations failing, a collapse of house prices and inflation.

The Bank's newly-created Financial Policy Committee (FPC) regulator meets today to consider the safety of UK banks and financial firms and will scrutinise the survey’s findings. It is the first time that the survey, which began in July 2008, has been published separately.

Paul Tucker, Deputy Governor of the Bank and a member of the FPC said: "We hope that the inaugural publication of detailed survey results will be of wide interest, shedding greater light on market participants' current views of confidence and risk.”

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Deficit Must Come Before Growth 
On the first day of the annual CBI conference yesterday, Prime Minister David Cameron addressed the audience of business leaders and said that the Government has a strategy for stimulating economic growth but that its first priority was tackling the UK deficit.

The strategy for growth will include measures to boost the house building industry, expand super-fast broadband, build new power stations and increase lending to businesses.

However, Mr Cameron insisted that dealing with the deficit must be “line one clause one, part one” of the plan for economic recovery. He said” I am absolutely clear about the right answer for the UK economy.”

Mr Cameron told the audience that the previous model of debt-driven consumer boom was “broken” and that the strategy should be for investment, more exports and a broader base to an economic future.

Asked during a Q&A session what the Government was going to do to deliver short-term growth, Mr Cameron sad “I don’t think there is one silver bullet that will make British business say ‘this is it’. I think there is a clear agenda across all those agendas.”

The Prime Minister also indicated that Chancellor George Osborne would be unveiling a new credit easing scheme in next week’s Autumn Statement, that would “pump billions” into reduced lending costs to SMEs and that the Government would use its huge purchasing power to strengthen the SME sector.

Reaction from the delegates to Mr Cameron’s speech was generally positive. Sir David Arculus, Chairman of small business bank Adermore, agreed that the deficit reduction message had to remain central and said “I don’t think that the toughness of the deficit reduction has ... hit home fully yet.”

Kanat Emirolgu, Managing Director of British Gas Business said that the Government should put more pressure on Europe to reduce regulatory barriers to the sales of services on the Continent.

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