It is nice to be able to write about better news for the UK economy following a whole range of encouraging data releases.
The CBI
The CBI’s latest survey data forecasts growth of 0.3pc this quarter, rising to 0.4pc for the next two quarters and between 0.5pc and 0.6pc for each quarter of 2014.
They commented, ‘Business investment growth should also pick up next year, to 6.3pc from current low levels of 3.3pc which have been subdued by uncertainty in the eurozone’.
Stephen Gifford, the CBI’s director of economics went on to say, “We continue to expect UK economic growth to strengthen and become more broad-based over this year and next. Global uncertainty has receded somewhat, setting the stage for a gradual improvement in trading conditions.”
GDP figures
This is in the wake of positive GDP figures for the first quarter and the news last week that Britain may not have suffered a double-dip recession after all.
Lloyds TSB
A separate survey by Lloyds TSB last week records the strongest growth in business activity for eight months across the English regions.
This and other positive commentary was rounded off by the upbeat comments made by Sir Mervyn King, the outgoing Governor of the Bank of England, in his last inflation report.
He gave the UK a rare vote of confidence in his report last week as the Bank raised its growth forecasts and lowered its inflation outlook for the first time since the recession struck five years ago.
In its quarterly Inflation Report, Sir Mervyn’s last after a decade as governor, the Bank forecast economic growth this year of 1pc, up from its 0.9pc projection in February, and for inflation to peak at 3.1pc in June, a little lower than its previous outlook. The pick-up will be immediate, with growth of 0.5pc in the three months to June following the 0.3pc expansion in the first quarter.
“Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago. That is the first time I have been able to say that since before the financial crisis,” Sir Mervyn said. “A recovery is in sight.”
Paradoxically, this good news could be BAD news for business funding and the creation of a sustainable recovery!
We have become very used to the ultra-loose fiscal policy adopted by the BoE over the past 5 years in an effort to save us from a financial Armageddon. It seems that interest rates have been at 0.5% forever.
From my own experiences of mortgages (and business loans) when we were starting out as a family, the norm was around 7%, soaring up to 15% when we came out of the ERM, and some drops down to around 5%.
We have come to accept the 0.5% rate as the norm!
According to the ONS, property debt now stands at £847.9bn, up 3 per cent on 2006/08. This is a massive sum, amounting to well over a half of annual GDP, bu the strange thing is that rather than worrying us, most of us don’t seem to care. Only 13.6 per cent of those with property debt thought it to be “a heavy burden”, down from 15.2 per cent in 2006/08. The percentage of people thinking it was “no problem at all” actually rose from 46.8 per cent to 49.5 per cent.
WARNING – THIS WILL NOT CONTINUE IF THINGS CARRY ON IMPROVING!
1. When growth starts to move upwards, and the recovery starts to look as if it is on a more stable footing, interest rates will have to go up as a defence against inflation. The cost of a mortgage will go up! This will mean less disposable income (and possibly an increase in repossessions) for the consumer.
2. With the consumer representing 60% of UK GDP, this will lead to lower growth and potentially more distress for many.
3. The sum of all these assumptions is that the cost of business finance will increase as interest rates rise and that the banks will become even more cautious about whom they lend to as first consumer confidence, and then business confidence weakens.
We therefore have the paradox that as the economy improves; it could actually be the start of another slowdown and even possibly another recession!!
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 john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: Templestream