Recent reports of a new ‘double-dip recession’ have struck fear into many people’s hearts. But is the UK really staring into the abyss again? Not at all, says Peter Ewen. You could even argue that it’s doing quite well.
Depending on which headline you read, the UK has “lurched”, “collapsed” or simply “fallen” back into a recession, following two consecutive quarters of contracting GDP. The latest growth figures are disappointing. However, the words “double-dip recession” should not lead us to believe that the UK economy is once again in trouble.
Actually, the economy is flat. In terms of the challenges facing businesses across the UK, a small contraction of 0.2% in the first quarter probably won’t have a major impact. Similarly, a slight expansion, say 0.1% (as predicted by many economists), would not have been a huge cause for celebration. Viewed in this way, the economy is, in fact, bumping along. You could even argue that it’s doing quite well when you factor in the negative impact of the Eurozone crisis.
Once you begin to look closer, the picture becomes more complex. The contraction was due, in part, to the very real problems faced by the construction sector, particularly in its lack of big civil projects. Other industries – automotive is a case in point – have been doing better and the services sector is holding up.
Meanwhile, the Purchasing Managers Index for the same quarter suggests growth in the economy, not contraction in the months ahead.
So this isn’t a time for despair. Yes, these are challenging times and they will remain so for the foreseeable future. However, for many businesses the tough choices and efficiencies they were forced to make at the height of the downturn will stand them in good stead in this much more stable – if flat – economic climate. Indeed, the private sector is continuing to create jobs, which shows that the UK economy has a robust core.
“The private sector is continuing to create jobs, which shows that the UK economy has a robust core.”
Inflation remains a worry, of course. Minutes from the Bank of England Monetary Policy Committee suggest that price rises will remain above 3% for most of this year. That will push up costs at a time when businesses are under pressure to hold prices down. However, there is no suggestion that interest rates will rise, and that can only be good news in terms of keeping borrowing down and allowing businesses to make plans.
Finding growth paths
The creation of an environment where businesses have the confidence to look ahead is crucially important at the moment. Overall, the economy is flat but even now there are growth opportunities, particularly for agile and small and medium sized companies. Taking advantage of those opportunities will often require investment and borrowing.
A stable interest rate is one of the factors that give company owners the confidence to borrow. The other key factor is reliable and available finance. Paul Tucker, Bank of England Deputy Governor, Financial Stability, pointed out in a speech to the Association of Corporate Treasurers in April that this is still an area where many businesses face a major obstacle. While noting that the bond market is playing a bigger role in financing large businesses, Mr Tucker asserted that bank lending remains the “backstop for working capital finance”.
The speech was a reminder that the finance industry, and the banking industry in particular, must play its part in providing companies with the funding they need to trade and grow. The Deputy Governor noted a rise in invoice finance and our own experience at ABN AMRO Commercial Finance suggests that an increasing number of companies are turning to Receivables Finance and the wider menu of Asset Based Lending products to meet their funding needs. It’s a trend that is likely to continue and I’m confident that Asset Based Lending will play an increasingly important role in that funding equation.
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