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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

Monthly global outlook – the Bears are gathering for a global economic slowdown but will it be a crash?

Global economic slowdown - or tsunami?While the “B” word is the focus of attention in UK and cited as the cause of low productivity and a UK economic slowdown, there is a growing body of evidence outside UK that is indicating a global economic slowdown although few are yet predicting a crash.
According to the Independent’s economics writer Hamish McRae: “The European economy has pretty much ground to a halt – and this has very little to do with Brexit. If, however, the Brexit negotiations go badly, then the sky darkens – and not just across Europe.”
Certainly, the prospects across the world are looking gloomier.
Recessions tend to be cyclical and come at 10-year intervals, and it is now a decade since the global Financial Crash of 2008.
Arguably, much more important than Brexit is the fact that ten years on Central Bank intervention continues, there are enduring low interest rates and that many nations are still on emergency monetary policies. And there is now a huge mountain of debt that everyone seems to ignore.
US Nobel prize-winning economist Paul Krugman is one of those predicting that there will be a recession in America by the time Donald Trump comes up for re-election at the end of next year.
The second half data from 2018 suggests that global growth has peaked and reported the onset of falling demand for goods and declining factory output in China, Germany, Japan and South Korea, to name a few of the countries particularly dependent on global trade.
In Davos last month IMF managing director, Christine Lagarde, warned that the risks of a sharper decline in activity had increased. Earlier this month came a report from the WTO (World Trade Organisation) that its quarterly indicator of world merchandise trade had slumped to its lowest reading in nine years.
Several Central banks, including the ECB (European Central Bank) and the Chinese have been trying to stimulate growth and investment.
You may remember that both Paul Krugman and Kenneth Rogoff, who is professor of economics and public policy at Harvard University, predicted the 2008 financial meltdown although they were ignored at the time.
However, interest rates remain at rock bottom and debt has been creeping up. As Krugman says, “we came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now … and we came into the last crisis with substantially better leadership …”
Herein lies the problem.
The world has changed, perhaps as a result of ten years continuing pain since of 2008 and little prospects of respite in the future.  We have seen a rise in protectionism and “populist” movements, most notably in Italy, in Eastern Europe and in Trump’s America, in his sanctions threatened against China, and in tensions between the US and Mexico.
If, as Krugman predicts and Rogoff warn, another economic crisis is looming it is unlikely that we will see the same, co-ordinated government action as was made by the G20 in 2008 that staved off a complete economic meltdown. Although this time there is little left in the tank, especially given the low rates of interest and huge levels of national debt. I see the seeds of huge interest rate rises.
To quote Rogoff in a recent article in the Guardian: “Crisis management cannot be run on autopilot, and the safety of the financial system depends critically on the competence of the people managing it…. The bad news is that crisis management involves the entire government, not just the monetary authority. And here there is ample room for doubt.”

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Rescue, Restructuring & Recovery

“Unknown unknowns” and the Fed's failure to confront reality

Will they? Won’t they? Should they? Shouldn’t they?
Every business analyst has been pondering whether the US Fed’s Open Market Committee would raise interest rates this week. Now we know with one exception there was a collective failure of nerve and interest rates have been held at their current level.
In essence the first rates rise since 2008 would have signalled the start of a return to normality and an indication that we are coming out of recession, which in our view would have been welcome. But clearly they bottled it.
The BBC’s Robert Peston opined that there was never a risk free time to raise interest rates. Indeed there is no comparison in history from which to infer the possible consequences.  This is because there has never previously been such a long period of near-zero rates.
This view was shared by business writer Hamish McRae, writing in the London Evening Standard on Monday.
We know some of the drawbacks of low interest rates.  Savers suffer because their savings earn them little or nothing. Borrowers, particularly household borrowers with mortgages, gain because they pay less interest although all too few have used this as an opportunity to pay down debt.
The fact is that those with a large debt, be they an individual, a business or a national economy, would face increased costs in paying back the debt following a rate rise and that would impact on future plans.
Plainly the worry about the destabilising effects of a rate rise on emerging economies (particularly Russia, Brazil and China) and the potential pain from rising prices and increased repayment costs for those that are have borrowed heavily to finance their economic growth played its part in the Fed’s decision.
But perhaps most of all the question of timing that has been exercising people and the “unknown unknown” of what a rate rise would do to a less than stable, post-2008 global economy was what justified the Fed for “wimping out” by kicking the can down the road.
Another “unknown unknown” may have contributed to their failure to confront reality, that of being held responsible for the unknown consequences.
We do, however, know that cheap money has distorted the markets and may have stored up potential for a crash. Such financial bubbles can only grow while interest rates remain low and the reality is that if a bubble is growing then the next crash will be bigger the longer it is put off.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Recession or lacklustre growth in the next decade?

We all know that forecasting is an uncertain business and that news headlines should be treated with considerable caution.
But it is difficult for a small business to plan ahead without paying at least some attention to both.
Over the last week or two a random selection of economic and business news has included, inevitably, China’s continued economic slowdown, warnings of a “global financial bubble” from Germany’s finance minister Wolfgang Schaeuble, and worries from the World Bank about the effects of interest rate rises with national and the global economies still so unsettled.
In the UK, manufacturing and engineering growth has continued to decline according to the ONS (Office for National Statistics).
At the same time the service sector continues to perform strongly and energy and raw materials costs have been coming down.
Yet we are told that the UK economy is one of the best performing.
Given these mixed messages a report from McKinsey & Company outlines four possible scenarios for economic performance in the next decade. There are two negatives. They are uneven and volatile but high global growth, or volatile and weak global growth. On the other side are rapid, globally distributed growth with productivity increases and, finally, low but more stable growth.
All depend on how countries manage both their own economies and co-operation to tackle international challenges.
Clearly SMEs, even those that operate solely in a domestic market, cannot remain completely immune to wider economic issues but given such an uncertain outlook, perhaps the best message is to remain cautious but “Keep calm and carry on”.

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Business Development & Marketing Cash Flow & Forecasting Finance General

No need for SMEs to panic over China

There has been a great deal of angst in the finance and business media over the impact China’s slowdown is having on stock markets around the world.
But actually, it could be argued that a reduction in their rate of growth is necessary as China’s economy reaches maturity. While the situation may suggest a slight slowdown in global growth and perhaps a further delay in raising interest rates there is little sign of worry about the prospects for the UK SMEs unless they sell to China.
Indeed the CBI this week revised its forecast for growth for the rest of the year from 2.5% to 2.6%.
For SMEs in particular, events on the wider global stage are unlikely to have much effect since most depend for their business on short term consumption.
Those that import from China may actually benefit from reduced cost as the price of Chinese products is likely to become cheaper.
Those SMEs that export luxury goods for China’s domestic retail market, however, may suffer a drop in orders as well as reduced margins due to currency devaluation.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery

Businesses exporting outside Europe – in this climate?

For some time now small businesses have been encouraged to look outside Europe for markets for their goods and services.
Indeed research by UPS found that UK SMEs have been outperforming those in Europe in developing their exports beyond the EU and increasing their turnover.
While the bulk of UK exports are still to the EU, 54% of UK SMEs had exported to other English speaking countries, such as the USA, Canada, Australia and New Zealand.
One could argue that SMEs should be looking even further afield. But how realistic is all this as a recipe for recovery and growth?

Export growth?

Markets across the world are increasingly jittery. There is doubt about whether the Bank of England will now raise interest rates this side of the forthcoming election for fear of destabilising UK recovery.
The 2008 Great Recession was a massive shock to the global economic system and the fear that it caused is nowhere near abated. There is even talk of another major financial meltdown looming in the next couple of years.
The IMF has been sending out dire warnings about global growth for 2015 because of the Eurozone’s ongoing failure to recover.
It is becoming ever clearer that the global financial system is now so interconnected that what happens in one part of the world has an impact on economies, wherever they are on the planet.
What price increasing exports in this atmosphere?

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Wednesday will be an interesting day for small businesses

 

Results of a survey into lending to small businesses are due to be published tomorrow (Wednesday) and are expected to prove an eye-opener.

The six-month survey, carried out by the British Chambers of Commerce (BCC) and Federation of Small Businesses (FSB) at the behest of Chancellor George Osborne, is widely thought to show that small businesses continue to feel excluded by the banks from lending, despite all the exhortations of the Chancellor and Treasury.

Bank of England figures have, in any case, already indicated that business lending continued to fall in the three months to February 2014 down by £500 million, following a reduction of £3.3 billion in the preceding three months.

Publication of the survey will coincide with the launch of a joint BCC/FSB website called Business Banking Insight (BBI), which is expected to allow small businesses to rate their banks’ performance on services and on understanding their businesses.

It is expected to give small businesses the information they need to compare offerings by banks and by alternative finance providers.

While it may be, as reported in the weekend’s Business Telegraph, that the Treasury will urge banks to increase competition in lending to small businesses, is it likely that bank lending will rise, given the lack of security for new loans and regulators’ requirements for higher capital reserves?

The matter for real concern should be existing loans and the impact on borrowers when interest rates rise.

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Banks, Lenders & Investors Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

From little acorns……..

 

Our regular readers will know that we continue to liberally apply a pinch of salt to reports on the solidity of the much-heralded economic recovery for several reasons.

Firstly, most national news emanates from London and there is still a great gulf between the capital and the rest of the country. Much of London’s optimism is down to the enormous rise in the value of property which has contributed to London home owners feeling wealthier.

Secondly, a little-noticed report in late April in the Daily Telegraph noted the latest data from the Bank of England’s quarterly report showing that business lending, especially to smaller and medium-sized businesses, has continued to decline for the sixth successive quarter.

Thirdly, there is the evidence of our own eyes and ears. We are hearing that small and micro businesses are still facing tough trading conditions. Most are having to work hard for the money they make as well as dealing with continued uncertainty and experiencing the frustration of a long wait for the decision on every contract they pitch for.

Finally, the greatest impediment to recovery and growth remains a fear of interest rates. While they will inevitably rise, the concerns are threefold: 1. the ability to service them, 2. the impact on consumer spending and 3. whether banks and other secured lenders will call in their loans like they have in the recovery phase after previous recessions.

Interestingly, David Boyle, writing in the Business Guardian this week points out that talk of rebalancing the economy (from London to the regions and from financial to manufacturing sectors) seems to have morphed into little more than reducing the trade deficit.

He argues that far more attention needs to be paid to putting money into what he calls “ultra-micro-projects” perhaps by using existing resources such as waste land, unoccupied people and buildings for innovative small businesses that would bring money into the community.

It may not be glamorous, nor is it attractive to the policy makers, but given that the so-called recovery is taking place in a situation where there is still a large amount of business and consumer debt perhaps his idea has some merit?

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Read the fine print

We are hearing stories of lenders applying enormously high rates of interest, as high as 59%, on asset-based loans to businesses or in one case, 26% per month.
It is possible that the influence of lenders like Wonga have persuaded people that rates up to 5000% for unsecured loans are the acceptable “new normal” and this has influenced the asset based lenders, especially for bridging or short-term finance, to significantly increase their rates or apply huge fees.
Some SMEs are desperate for money, perhaps because they want to take advantage of the improving economy to develop or more often due to creditor pressure, and as a consequence are neither thinking straight nor considering restructuring as an alternative when agreeing to such loans that are normally secured against personal assets.
While annual rates quoted on a loan may seem reasonable, it is only close scrutiny of the paperwork that reveals penal rates such as the example of 26% per month that may apply to a covenant breach, despite any security.
Our advice is to look very carefully at the detail when considering an asset-based bank loan and to shop around for alternative sources of finance.  There are plenty of options out there and you can find them in our free, downloadable guide:  http://www.k2finance.co.uk

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery

Leadership, Restructuring and the Eurozone

The Germans and other northern members have benefited from the Euro effectively fixing the exchange rate that has made it easy and relatively cheap for them to sell their cars etc to southern members to whom they lent money to buy their cars. This is very similar to the banks lending money to customers who spent it.
The issue then is who takes responsibility for the debt and managing the Eurozone fallout. Do lenders write off debt, or do they lend more such as via Eurobonds or Quantitive Easing (QE) with terms that impose huge penalties. This latter route is similar to the reparations that planted the seeds of the second world war, a subject that has recently been put on the table. Or do lenders defer payments that allow for a fudge whereby loans are repaid over an extended period that effectively allows inflation to devalue the loans.
The UK has opted for the fudge route and will avoid banks defaulting through QE, low interest rates and using inflation to reduce the cost of repaying debt. While most borrowers will benefit, those with assets, savings and reserves will see them devalued while the debt overhang is cleared. Although this is regarded by many as a mistake, we saw in 2007 and 2008 what happens when banks default and are right to avoid bank defaults.
Europe however has yet to find a solution whether it is by managing southern member defaults, or providing more loans to avoid default. The problem facing European leaders is that they need to be strong and stand up to their electorates if the lessons of history are to be applied.
While European leaders find their backbone, in UK our political leaders are looking decisive, a tribute to both Darling and Osborne. Inspite of the decisions taken it will still take a long time to clear the debt overhang with a floating exchange rate and inflation to reduce debt and low interest rates to smooth the way.
Most UK companies that have undergone restructuring have much stronger balance sheets and are building reserves ready to take advantage of the Eurozone fallout. However there are still many more UK companies, that like many European members, have weak balance sheets and continue to struggle while they and their lenders put off the inevitible restructuring.