There is an increasing clamour for growth in the UK economy from an ever wider range of interested parties.
GDP in 2012 has been disappointing. Negative growth in the first two quarters threw us back into the dreaded ‘double dip’ recession, followed by a significant rise in the third quarter, which many commentators believe to be on the back of the Olympics and the way in which additional public holidays have fallen.
As we make our way through the fourth quarter, the outlook remains uncertain and both business and consumers are understandably wary. Small to medium enterprises seem to get squeezed on both sides: availability of funding dries up because banks are too cautious to lend. Cash flow problems persist because customers – B2B and B2C – are too cautious to spend.
So where do we go from here?
Growth can come from one of two main areas:
1. An increase in Business confidence. Businesses want to know that demand is not going to fall off a cliff, and that the necessary business finance is available to avoid the cash flow problems that have been experienced by so many companies.
This confidence would lead to businesses spending more money on developing goods and services that other businesses, or the consumer, need.
2. An increase in Consumer confidence. Consumers needs to know that their jobs are safe, that their major asset (their house) is not going to plunge in value, and that interest rates are not going to increase to the levels seen following the recession in the early 90s – or even to the long term (1971-2012) average of 8.29%.
If the consumer feels suitably secure, they will go out and spend more money on houses, cars, appliances, entertainment etc. All the things that will help business confidence! It’s a vicious circle.
What do we need for this to happen?
The common denominator here is access to finance.
Unfortunately many of the high street lenders are still recovering from the financial meltdown in 2007/8. They were massively over exposed, and as a result both their balance sheets and reputations have taken a significant battering!
They are now trying to repair the damage and are using a period of consolidation to rebuild both. It seems they have decided their biggest risk areas are the SME business and the consumer (without significant equity). As a result, both are suffering from reduced service levels and a lack of available credit.
This has now become a self-fulfilling prophecy; neither of these groups is asking for finance for fear of being refused. This leads to a lack of aggregate demand, and therefore static or reducing asset values – particularly housing. This of course reduces the confidence of both the consumer and businesses! A conundrum!
Unintended consequences?
If we add into this the ability of some businesses that are carrying forward large amounts of debt finance, as a legacy of the freely available credit pre 2007, to continue trading (so-called “zombie companies” because they may still be functioning but they cannot claim to be thriving – all the while soaking up the capacity that other businesses would love to pick up!), this adds another layer of complexity. This is a result of a relatively benign environment that was fostered to help business:
- Record low interest rates that enable the servicing of these debts, but probably not the repayment of the capital.
- Banks knowing that these businesses will never recover, but preferring to accept the servicing of loans rather than crystallising more bad debt that would further damage their recovering balance sheets. This is especially relevant with the Basel III regulations insisting that banks now hold much increased levels of Tier 1 capital.
- Support from HMRC with Time to Pay agreements, and a far more understanding approach than in previous downturns.
We therefore have another problem with growth. In previous recessions (pre Globalisation) there has been a natural rebalancing post-dip, with the weakest falling by the wayside and the strongest picking up the capacity that then becomes available. That is not happening this time. Therefore an unintended, but significant, consequence of government’s current attitude toward the economy could actually be slowing UK growth.
“In the middle of difficulty lies opportunity.” – Albert Einstein
On a more upbeat note, this environment continues to produce significant development opportunities even for those businesses currently experiencing difficulties. The key to unlocking those opportunities is ensuring that both business and consumers have access to funds. Encouraging traditional business finance options and developing new business funding options could be the answer to the growth conundrum.