Should someone be calling the top of the UK economy before we all get our fingers burnt again?
Is the current stock market rally and increase in consumer confidence a false dawn? Why have we gone from sack cloth and ashes just a few months ago to what is being described in parts of the media as something akin to a new Golden Age.
Just in the last few days the British Chambers of Commerce has upgraded its hopes for the UK economy and predicted three years of growth and, even more importantly, the Daily Express has ‘House prices set to boom’ splashed all over its front page!!!
Many commentators are involved in talking it up, making it seem like something it isn’t. This, in my opinion, is very different from being positive, which is an important part of any business’s armoury even when facing the most difficult turnaround situations.
The last thing in the world I want to do is talk it down. But are we not getting a bit carried away with all this? Is this not how the global financial crisis we have just experienced, the worst in a generation, started? All I seek to do here is to suggest a little moderation when evaluating the current situation before we all end up with highly leveraged businesses, massive mortgages and a portfolio of shares that is showing significant losses! Sound familiar?
There are, in my view, a number of situations we should be aware of:
- The HSBC index for the global business cycle peaked at a three year high in April this year. They see evidence of a cyclical downturn! The bank has said it is cutting its holdings in high-yield credit, gold and emerging markets. It now has over 40% of its investments in US Treasuries!
- The Eurozone remains mired in recession. The key players, Germany, France, and the ECB, notwithstanding the UK, are at loggerheads on the route forward. It is forecast to shrink in 2013 for the second year in succession! Unemployment is a post EMU high and is an incredible 27% in Spain alone! The proposed austerity in the Eurozone is some way away, with the EC recently giving Holland, France and Spain extra time to meet their GDP deficit targets of 3pc.
- Commodity prices peaked in September 2012.
- The Credit Suisse Index of Global Risk Appetite is approaching levels last seen in 2007!
- China – The IMF recently cut China’s 2013 growth forecast to 7.75pc, from 8pc due to weaker global demand. Total credit growth in China has risen rapidly over the past year, led by a boom in local government borrowing to fund infrastructure investments. Analysts have also highlighted the dangers of China’s credit boom. “If credit growth is too fast and economic growth is not catching up, it shows that corporates are not able to generate profit, so they have to borrow more and more to sustain the system. Clearly this can potentially pose a financial or systemic risk,” said Wei Yao, an analyst at Societe Generale.
- Finally, stock markets and the effect of QE. Markets are betting that central banks will pile back in when the going starts to get tough. The US Federal Reserve is talking about the reduction of its $85bn per month of bond purchases. This should be enough to frighten everyone but this doesn’t seem to be happening! The availability of covenant lite leveraged loans continues to drive the US equity markets to new highs!
This is all financial engineering designed to get us out of our financial crisis in the least worst way. No option is a good one! However an unintended consequence (or maybe it is entirely intentional?) is that it is creating a confidence and false sense of security that is built on sand! Are we not possibly sleep walking into another financial Armageddon so soon after our recent experiences?
I really hope not….
Given all of the evidence listed above I would urge caution when reviewing your business finance strategy. Don’t allow this new found optimism and booming stock markets to cloud key decisions around new or replacement business finance.
Finding alternative funding
If the continuing lack of availability of funding is affecting your business, please contact us. We are specialists in this field and can hopefully point you in the right direction.
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at firstname.lastname@example.org or on 0845 689 8750.
Image by: Peter Nõu