Broad money supply growth (excluding the shadow banking system) slowed in February from 1.2% month-on-month to 0.6%. That would normally be a sign of a slowdown in economic activity but at this juncture, against the backdrop of an economic lockdown, we regard this slower build-up of cash balances – much of which is ‘forced savings’ – as a positive sign. This lends further weight to our view that an exuberant consumption-led recovery, driven by pent-up demand and fuelled by lockdown-induced savings, is in the offing (see our latest economic quarterly for more on this).

The UK housing market also remains buoyant. The Stamp Duty cut and changes in living preferences appear to outweigh the dead hand of social distancing, with 88 thousand new mortgage approvals in February, slipping modestly on a monthly basis but still some way above the pre-crisis 3-year average of 66 thousand. Royal Institution of Chartered Surveyors (RICS) survey data signals renewed strength in the coming months – gains in expected prices and new buyer enquiries.

Against that backdrop, corporate funding appears to be normalising. Funding for non-financial private corporates (PNFC) staged a partial but broadly-based recovery in February (see chart below), rising 0.3% from the month before after a 0.6% monthly decline in January – and pushing corporate lending to a 7-month high.

PNFC net financing (£ billions per month)

The detailed breakdown of UK corporate funding in March shows an increase in financing across most sources: bank lending (+£1.9 billion), corporate bonds (+£0.2 billion) and equity issuance (+£1.1 billion). Only net commercial paper (CP) funding declined in March (-£0.5 billion). But on aggregate, following a surge in financing during the early stages of the pandemic, a more stable pattern of UK corporate sector funding appears to be emerging, potentially marking an important turnaround.

Corporates have reason to be cautiously optimistic. The Bank of England’s (BoE) latest Credit Conditions Survey (CCS) show notable improvements in the expected supply of, and demand for, credit, a sign that credit conditions continue to improve. Financing for mergers & acquisitions (M&A) purposes, at decade-long highs, also remains buoyant across a range of sectors as opportunistic buyers & eager sellers combine with an abundance of capital (thanks in part to ultra-loose monetary policy).

But it also shows a sizeable increase in corporate demand for funding to finance new capex – which reached multi-year highs despite remaining in negative territory overall (see chart below).

Bank of England Credit Conditions Survey: corporate demand for funding (net % balances)

In the months ahead, support measures included in the latest UK Budget should provide a boost to business investment, or at the very least front-load corporate spending. In general, we expect UK corporates to remain a little defensive as the economy slowly reopens. And because we think consumers will be the primary drivers of the economic recovery, corporate capex is likely to lag other growth components – like household consumption – over the next year or so. Nevertheless, the latest data show we may be reaching an important turning point as we escape the pandemic’s grip: corporate funding is starting to normalise, credit conditions are improving, and – crucially – businesses are starting to invest.

To speak with us about this article, get in touch with your NatWest Corporate & Institutional representative or contact us here.