London,
06
October
2016

BRR E-alert: I read the news today...oh boy!

Business Recovery & Reconstruction E-alert: News & Views from The Bridge

Summary

With summer now a faded memory and the US election result now replacing Brexit as the next potential cause of global economic apocalypse, I thought it might be time to take stock and assess whether we in the business recovery and reconstruction world are set for fertile or lean times ahead.

The insolvency world is commonly perceived as a bellwether industry, inexorably linked to the economic climate. The industry will prosper not only in times of a falling market, where creditor-led recovery work is to the fore; but also a rising one, where restructuring work will see competitive companies taking over weaker rivals, refinancing opportunities etc.. As a result we are attuned to market movements and will often be asked for our views on the state of the UK economy. Questions of this nature are often accompanied by "I bet you are busy."

It is no great surprise to those in the industry to learn that the corporate insolvency rate in the 12 months ending Q2 2016 was 0.42% of active companies, the lowest level since comparable records began in Q4 1984. [Source: National Office of Statistics].

Post Brexit and awaiting Q3 statistics to fully assess its initial economic impact, how is the economy fairing? What are economic forecasters predicting? On one day in late September, I began to read my daily newspaper for clarity.

'The UK economy grew a solid 0.6% [in Q2 2016] in the months leading to the [EU] referendum as consumer spending picked up and business investment bounced back.' With household spending accounting for two-thirds of the economy, surely this is good news.

But wait, in another article, it was reported that 'The British Retail Consortium said that UK retail sales have delivered the weakest performance in two years in August.' Nigel Oddy, Chief Executive of House of Fraser reporting on sales in the first half of the year said yesterday "trading since the end of the reporting period continued to be 'challenging'" adding that "Brexit was only one among many factors depressing consumer confidence."

So are consumers confident or not? I am confused.

My confidence was buoyed when I noted that 'Britain has become the world's seventh most competitive economy…it was the country's highest position in the ten years that [the World Economic Forum think tank] has been running its index.'

This was followed by an article 'Global Trade is growing more slowly than the world economy for the first time in 15 years, the World Trade Organisation has warned…..This year it will manage only 80% of global output, the first shortfall since 2001 and only the second since 1982.'

So Britain is becoming more competitive just as the world is heading into a period of threatened isolationism and the Country's success is maybe more a reflection of others weaknesses. I am disheartened.

Post Brexit together with an additional £60bn to the continuing Quantitative Easing (QE) Programme, the Bank of England cut rates to 0.25%, a record low and the first cut since 2009. In another article Deputy Governor of the Bank of Eng3land, Minouche Safilk was quoted as saying that following these measures better than expected economic data since August that have left most indicators flashing “a little less red, a little more amber, though [they] mostly remain below average levels,” suggesting the slowdown, “may not be as sharp or as sudden as we might have feared”. Despite this, she was quoted as saying in her personal opinion rates will probably have to fall further.

So low interest rates are good news?

Then I read 'Productivity has been exceptionally weak since 2007, and reviving it is essential to sustain growth and living standards……Better matching of skills to jobs and higher skill levels would also lift productivity. Financial conditions have improved for businesses, but as markets tighten more rapid exit of non-viable businesses would make room for new, more innovative businesses.' [Source: OCED June 2016 Economic Outlook Summary].

I am sure I have heard something like this before. Weren't 'non-viable businesses' being referred to as 'zombie companies' over 18 months ago and an anticipated turn of the economic wheel was predicted as causing such companies to spin out into the insolvency industry, providing investment opportunities for new better stronger businesses. This certainly hasn’t happened so far.

But what's this about productivity? The unprecedented banking crisis of 2007-09 followed by record low interest rates and QE has added strain to the banking system leading banks to curtail lending and companies to save as opposed to invest. A lack of investment in new technologies and an inability to upskill a labour force is thus being blamed on the fact that traditional routes of debt financing have dried up and that companies are scared to invest preferring to keep cash deposits high.

So low interest rates are causing 'zombie companies' to 'live' and cause the productivity conundrum which has arisen since 2007; that's bad isn’t it? I am perplexed.

I am also told the post Brexit fall in sterling is good news, meaning that our exports are cheaper and investment in the UK more attractive. Then I am told a fall in sterling causes a rise in import costs and inflationary pressures. Is this good news or bad? I can't tell. I am dazed.

I set myself the task of assessing whether we are in for fertile or lean times ahead; on one day in late September I am none the wiser.

Author
photo:Vernon Dennis
Vernon Dennis
Partner
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