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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Turnaround

Uncertainty after the Referendum is producing some wild predictions

keep calm and stay positiveIt is true that businesses dislike uncertainty when planning for medium and long term investment and that it will probably be at least two years before there is any clarity on the UK’s position over leaving the EU.
But how likely are the speculations of some economic commentators that the UK may be facing a period of stagflation, defined as a period of rapid interest rate rises coupled with a depression?
The last time the UK experienced stagflation was during the 1970s, when huge oil price rises precipitated an economic downturn in much of the Western world.  In the UK a combination of climbing interest rates and government borrowing, high unemployment and a miners’ strike culminated in Edward Heath’s government declaring a state of emergency in January 1974 and imposing a three-day week on industry amid fears of power shortages.

So what likelihood of a repeat of such a perfect storm?

Plainly much has changed since then including tighter regulations on strike action and diminishing trades union powers, less reliance on coal-fired energy supply, control of interest rates being moved to the Bank of England, and, at the moment, relatively high levels of employment.
While it is true that the IMF (International Monetary Fund) has downgraded global growth since the referendum, its predictions for the UK are still sturdier than they are for Germany and France.
Interest rates have been at unprecedentedly low levels since the 2008 financial crash and it would seem that the Bank of England may yet provide further stimulus by reducing them below the current 0.5% figure as well as introducing more quantitative easing. This is uncharted territory and lending markets may reassert their authority by demanding higher interest rates given the greater perception of risk caused by Brexit.
Another factor is the devaluation in £Sterling which followed the referendum results. At the moment this translates into cheaper exports from the UK and very soon will lead to price inflation for consumers due to the increase in cost of commodities bought by UK companies in $US or in Euros. 
In fact, commodity prices have been falling for some time thanks to lower demand from China and in the last week oil prices came down again by 20% after rising slightly for a short time. But when commodity prices rise, the impact will be felt by everyone.
Although uncertainty will lead to lower growth as some businesses hold off on investment there will need to be massive rises in commodity prices and interest rates, perhaps combined with a significant rise in Chinese consumption for the preconditions for stagflation to exist.
If, in addition future governments turn more protectionist by erecting barriers to trade and migration, while introducing measures to combat inequality by redistributing income (through taxation and regulation) then the situation could become more precarious.
While the referendum result has crystallised issues and opportunities in the UK and there will business winners and losers, in our view the more extreme predictions of imminent stagflation are decidedly premature, if not straying into the realms of fantasy.

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Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Economic forecasts for SMEs

Nobody starts a business without expectations and plans for its future success, and we all need to make predictions about the future when preparing plans and making key decisions?
While many plans and decisions are based on what happened last year, a view of the future is required. Decisions need to be underpinned by predictions about the market and the economy. While few SMEs carry out formal market research, they are generally well informed about their market and have a good feel for how to satisfy their customers at a profit to themselves. Indeed if they don’t they won’t survive.
SMEs also need to make predictions about the economy and broader market, and how this might influence key decisions: What type of products/ services to provide? How much stock to hold? Forward orders for supplies? Need more or less staff? Increase wages? Can prices be raised? Invest in new plant & machinery? Grow or contract the business? Say “no” to new business? Develop or reduce capacity? Interest rates? Exchange rates? Carriage costs? Invest more on marketing? Buy or lease vehicles? Enter into long term contracts?
The building sector is a good example: is it booming? Or are customers hanging on to their cash? Another is retail: how much and what type of stock to I need for Christmas? Indeed we have seen the recent collapse in commodity prices which has caused the collapse of steel manufacturers.
Despite any economic uncertainty there is still a need to make decisions and SMEs need to develop their own economic forecasts.
There is a wealth of macroeconomic data sources that can provide valuable insights into almost all markets. It may take time to find the ones that are relevant but once found they can become part of a tailored economic forecast for a business.
Baltic Dry - 30-year indexAs an example, the Baltic Dry Index (BDI) is an economic indicator issued daily by the London-based Baltic Exchange that monitors the price of moving the major raw materials by sea. This is relevant because it is a measure of the demand for shipping capacity versus the supply of dry bulk carriers where it takes two years to build a new ship, and the cost of laying up a ship is too high to take out of trade for short intervals. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.
Another is the Shanghai Containerised Freight Index (SCFI) that tracks spot rates (not contractual rates) of shipping containers from Shanghai to 15 major destinations around the world. It can give a useful view of global trade and another perspective on the cycle of boom and bust. Despite many pundits suggesting we are doing rather well, the SCFI has collapsed with the index down 51% since February this year.
SMEs that have their own economic forecasts can use them to inform both short term decisions and long term plans.