I have already mentioned this morning the capacity that the government and/or the Bank of England have to help mess up the economy this winter, with an interest rate rise being the greatest folly that they could impose, with a consequent stock market collapse on the cards if they get this wrong. However, it's not only the large business sector that might see real risk this winter: the small and medium-sized enterprise (SME) sector is also at risk.
The pandemic presented a large financial shock to UK businesses. Support from authorities – including the Government and Bank of England – and from the financial sector helped businesses to continue operating during the pandemic. Part of the support came in the form of government-backed lending to businesses.
Overall, the level of debt taken on by UK businesses has increased moderately during the pandemic. But there has been a larger increase in borrowing by small and medium-sized enterprises (SMEs). Many of these businesses had not previously borrowed.
A high level of debt among UK businesses can lead to risks to the financial system. Higher debt levels can cause businesses to cut back on employment and investment more in the face of economic shocks. This can have a negative impact on people’s jobs and incomes. Banks can also take losses if businesses struggle to pay back their loans.
The sums involved are smaller:
However, the scale is bigger, as is clear. And there is no guarantee that in an economy that is struggling that there will be the capacity to repay the loans that these smaller businesses have taken on. The risk to the economy is very real because almost half of all people work in this sector.
The Bank is right to be worried. I was right from the outset of this recession, saying (rather repetitively as I recall) that the reopening was when the problems would raise. And they are.