Three gloomy reports will put pressure on Bank of England to pump £50bn more into economy when it meets this week
The beleaguered state of the UK economy has been underlined by three separate reports revealing that Britain's one million small and medium-sized businesses were facing their most difficult year since the recession of 2009.
Sharp declines in bank lending to smaller firms, and a collapse in confidence across the sector outlined in the reports will add to concerns that the economy is about to enter a second recession in three years, analysts said.
The gloomy reports will also put pressure on the Bank of England to pump an extra £50bn into the economy when it meets on Thursday.
Mervyn King, governor of the Bank of England, has indicated he could support an extra boost to the £270bn quantitative easing programme if there were evidence of a further tightening in bank lending and a deterioration in the economic outlook.
Several other members of the nine-strong monetary policy committee are expected to vote in favour, including the economist Adam Posen, who believes an extra £75bn could be justified.
The European Central Bank has also faced calls to ease monetary policy to offset cuts in public spending and rising unemployment across the eurozone. The bank, which has allowed European banks to borrow £500bn since the start of the year in response to the deepening euro crisis, could cut interest rates further to ease borrowing costs, analysts said.
Most economists expect the Bank of England to sanction further quantitative easing despite positive figures from the services and manufacturing sectors last week that showed a steady expansion over December and January.
According to the Markit/CIPS UK services PMI poll, services firms, which make up more than two-thirds of the economy, were more optimistic about the outlook and had the strongest growth in new business since last July.
Businesses in the sector, which includes hotels, restaurants, banks and transport, gave cheer after official figures showed the economy contracted in the fourth quarter of 2011 but they hired new workers at the fastest pace for almost four years.
However, a report by economic forecasters the Ernst & Young Item Club is expected to dampen the mood. It said bank lending this year would be the lowest since the recession of 2009.
The Item Club expects total bank loans – after expanding by an estimated 4.3% in 2011 – to contract by 2.2% in 2012, with just 0.9% growth forecast in 2013.
Bank lending is considered a crucial measure of economic health and a fall this year could cripple many businesses that have struggled to keep their doors open since the recession.
Neil Blake, its senior economic adviser, said: "We have been warning about the impact bank de-leveraging could have on the economy for some time, but this is the first time there will be an annual contraction in total loans since 2009, when the UK economy was still suffering from the immediate effects of the global financial crisis."
A separate report, by the accountancy body ICAEW, found that business confidence had fallen at a record rate, and firms were planning to cut investment.
Job creation plans also stayed subdued, though small and medium-sized businesses were more likely than larger ones to hire people in the next 12 months, the report said.
Michael Izza, chief executive of ICAEW, said: "At the moment it is hard to see where growth will come from and the chancellor, George Osborne, needs to use the forthcoming budget to give businesses reasons to be more confident about the future – and unlock potential investments."
Osborne is understood to favour a boost to quantitative easing by the Bank of England to offset his austerity measures.
He came under fire last week from opposition MPs for sticking to his plans after the Institute for Fiscal Studies said he could spend at least an extra £10bn without undermining confidence in the UK's fiscal outlook.
Chuka Umunna, the shadow business secretary, said: "It is particularly worrying that business expectations for capital investment have fallen for a third successive quarter. Low business confidence is hitting Britain's future growth potential and discouraging firms from investing for the long-term, with over half of businesses surveyed operating below capacity.
"Vince Cable's promise that the Department for Business, Innovation and Skills would be the 'department of growth' has been exposed as little more than empty rhetoric, as ministers have failed to adopt an effective plan for growth or take meaningful steps to support businesses and our key sectors.
"Labour's five-point plan would get the economy moving again, including by bringing forward long-term investment projects and temporarily reversing last year's damaging VAT rise."