In our assessment, the supply capacity of the economy is expected to be around 1¾% lower than it otherwise would have been in the absence of Covid by the end of our forecast period. But, of course, there are risks on both sides of this assessment. The third point is that, although those sectors which are growing may require new capital, elevated uncertainty is expected to continue to reduce investment other things equal, weighing on the capital stock and productivity growth. I have just used the phrase “other things equal” to describe the likely path of investment. However other things ought not to be equal going forward in my view. I mentioned earlier that we have had a decade or more of slower growth and weaker productivity growth. And, as Chart 5 shows, although business investment did recover from a low base following the global financial crisis, it too was weak in the period prior to the Covid pandemic. This was only partially offset by growth in government investment, which has also generally been weak over the same period (Chart 6). The effect of this weakness in investment can also be seen by looking at capital services – a measure of the value of the flow of services which are derived from the capital stock, including machinery, equipment, software, structures, and land improvements. This may better capture the drivers of supply growth than looking at growth in investment alone.
In particular, the flow of new mortgages slowed considerably in the second half of 2022, falling 5.4% year-on-year in Q4, in line with the moderation in house purchases and prices. - The stock of lending to non-financial corporations and sole proprietors fell by 1.5%, with a more marked drop in the sectors hardest hit by the pandemic (6.9%). This despite new loans growing 15.2%, while the principal drawn on available credit lines rose by 23.3%. 4  - The average interest rate on loan portfolios increased during 2022, particularly in the last quarter of the year. However, the pass-through of the changes in reference rates (around 30%-40%) was lower than that implied by the historical sensitivity to the cycle. Credit quality  - In 2022 the non-performing loan (NPL) ratio4 fell by 0.8 pp to 3.5% at December, the lowest level since 2008, with cumulative declines since the start of the pandemic of 1.6 pp for the corporate sector and 1.4 pp for households. In the sectors hardest hit by the pandemic, the NPL ratio fell by a lesser degree (0.3 pp in 2022, to 5.6%). 4  The faster decline in NPLs in 2022 was driven both by smaller inflows and larger outflows. 5  - Stage 2 loans likewise declined, falling by 0.9 pp to 7.1%, as a result of both lower inflows and larger outflows to performing status. However, the stock of Stage 2 loans remains 24.5% higher than pre-pandemic levels.