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

Sector – business in UK’s North and Midlands

UK's North and MidlandsThe UK’s North and Midlands were once the powerhouse for the country’s economy, with its manufacturing and engineering industries driving the Industrial Revolution in the late 19th Century.
Cities such as Leeds, Bradford, Manchester, Sheffield and Birmingham were the industrial heartland of UK when national economies depended heavily on what they could make and sell, from textiles to steel and heavy engineering machinery.
But as industry in UK declined, the UK economy shifted its focus to services and in particular to the professional and financial services with a lot manufacturing being transferred to countries such as India and China, where production costs were much lower. This was also associated with a shift in the UK economic centre of gravity from the Midlands and the North to London leaving much of the country behind.
Vestiges of industry have survived in places like Sunderland, where the Japanese car manufacture Nissan has thrived and recently increased its commitment by investing more than £50m in its plant that builds the Qashqai model.
According to a “State of the North” research by the IPPR (Institute for Public Policy Research) and reported in the Yorkshire Post  in November 2019, “only countries like Romania and South Korea are more divided” than the UK.
It found that “in Kensington and Chelsea and Hammersmith and Fulham, disposable income per person is £48,000 higher than in Blackburn with Darwen, Nottingham and Leicester”.
In December 2019 various reports by the Centre for Cities highlighted the issues. According to the Financial Times it had found that the economic divide between London and the rest of the UK widened last year.
The FT also quoted ONS (Office for National Statistics) figures that showed that “The UK capital recorded a 1.1 per cent annual rise in output per person to £54,700 in 2018, increasing the per capita gap with the poorest region — the North East — where growth was only 0.4 per cent to £23,600 per head”.
The Centre for Cities research analyses business and employment opportunities across the UK, finding that many northern cities are underperforming, hampered by a need for growth and by being at different economic stages in terms of availability of skilled workers and of infrastructure.
But there have been some signs of hope for the UK’s North and Midlands amid the gloom with the Centre for Entrepreneurs think-tank reporting that Birmingham is now the UK’s start-up capital outside London. The British Business Bank has also revealed that entrepreneurs in the north of England received more loans than those in London.
Business Live recently reported that figures from UK Powerhouse have shown that Stoke-on Trent has the fastest employment growth in the UK.
During the recent General Election much was made of pledges to level up the economy with heavy investment promised for the UK’s North and Midlands.
Among the promises made by the Government is a pledge to get on with the proposed HS2 railway to connect northern cities like Birmingham, Manchester and Leeds to London. It argues in support of this plan that “The Midlands already has the highest concentration of businesses outside London, including international firms such as Jaguar Land Rover, MG Motors, Deutsche Bank, JCB and the 150 year old, West Midlands-founded FTSE 250 engineering firm IMI”.
It has also promised “massive investment” in a new institute of technology to be based in Leeds, and to be modelled on MIT in the US (Massachusetts Institute of Technology) and there are suggestions that parts of the Treasury will be relocated to the North of England.
Whether these promises will be delivered remains to be seen, especially given the more immediate and pressing problems of the NHS demands due to the worldwide pandemic of Covid-19 now playing havoc with the global supply chain and countries’ economies.
Perhaps this week’s budget will provide some clues.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

December key indicator – the UK economy at the end of 2018

storm clouds over UK economyAs the end of the year approaches, this month’s Key Indicator looks at the state of the UK economy.
Assessing an economy is not only about facts and figures, it is also about perspectives over time and the effects of business sentiment, and there is little doubt that the country has been facing an uncertain future for the past two years.
Since the Financial Crisis of 2008, the UK economy dropped from being one of the fastest growing of the G7 economies (UK, Canada, France, Germany, Italy, Japan and the US) to being the slowest by the first half of 2018.
The UK economy shrunk by more than 6% between the first quarter of 2008 and the second quarter of 2009 and took five years to get back to the size it was before the recession. Had the pre-2008 momentum been maintained it has been calculated that productivity would have been 20% higher than it actually was at the end of 2017. The size of the UK economy has increased by just 9.7% since its pre-downturn peak according to the ONS (Office for National Statistics).

The impact of confidence – or lack of it – on the UK economy in 2018

It is generally accepted that from large corporates to SMEs, businesses dislike uncertainty since it has a significant impact on their ability to plan ahead with any confidence.  Confidence, or lack of it, also affects the behaviour of investors and lenders when considering investment in growth. This can be seen partly in the behaviour of the stock market, which has been decidedly volatile in the last two years, thanks to three main factors: the ongoing opacity of the Brexit outcome, the potential for a change of government to one that is viewed as anti-capitalist, and the potential consequences of a US trade war with China.
The rapid upturn in markets following the announcement after this weekend’s G20 summit of a 90-day suspension of tariffs to allow for US-China trade talks is a good example of volatile market sentiment.
PWC (Price Waterhouse Cooper) analysis reflects some of this sentiment in its most recent assessment of the UK economic outlook, which expected growth to remain modest at 1.3% in 2018 and 1.6% next year.
IHS Markit/Cips monthly snapshots also reveal levels of confidence among different sectors of the UK economy. Its most recent Services sector (retail, hotels and transport) confidence indicator had dropped from 53.9 to 52.2.
A Dun & Bradstreet survey of SMEs in November also found that 40% felt Brexit had slowed their growth and another piece of research by Deloitte found that only 13% of CFOs were more confident than three months ago and 79% felt that the longer term business environment would be worse after the UK leaves the EU.
Both the ONS and the Bank of England’s most recent assessments (to September 2018) indicated that investment by companies fell by 0.7 per cent in the three months to June, following a contraction of 0.5 per cent in the first quarter and that many businesses are putting investment on hold.
The Investment Association has calculated that UK investors have pulled nearly £9 billion from funds investing in British companies since the referendum.
Clearly confidence is crucial to investors as well as to business planning.

The health – or otherwise – of sectors in the UK economy

As I reported in my latest blog on the quarterly insolvency figures, there is a gradual upward trajectory in insolvencies which accelerated in the third Quarter with an increase of 8.9% on the previous quarter, driven largely by CVLs (Company Voluntary Liquidations) primarily in the construction, wholesale and retail sectors.
Retail sales were down in October and house price growth has been stalling throughout the year and is now at its weakest level since 2012.
However, the fall in the value of £Sterling against other currencies has arguably benefited the leisure and tourism industries since it makes visiting the UK more attractive to overseas visitors. This is borne out by the ONS growth figures for Q3, which showed that rolling three-month growth was 0.6% in September 2018, building on growth in the previous two months.
It has also benefited the car manufacturers, whose exports to non-EU countries increased by £1bn, while imports fell by £1.7bn, in the three months to September. Domestically, however, trade in motor vehicles decreased by 6.2% in September which might suggest a decline in consumer confidence.
The impact of £Sterling devaluation is also reflected in the latest ONS figures, that showed that there has been an increase in UK firms trading internationally by almost 16,000 last year. The total of 340,500 businesses trading abroad represents 14.3% of non-financial businesses in Britain. Non-financial services made up 53.1% of Britain’s international traders. Manufacturing growth also resumed in Q3 after two consecutive quarters of contraction.
Traditionally, the UK’S financial sector has been the strongest part of the UK economy, but there are some worrying predictions on the horizon with the possibility of an estimated 5,000 City jobs being lost, according to the City minister, John Glen, and the Bank of England, and as many as 37 finance firms potentially preparing to relocate to Europe. Indeed, many have already established offices abroad as part of their Brexit planning.
It should be emphasised that both a degree of clarity over the eventual position of the UK economy outside Europe and a longer time perspective are needed to be able to predict the future for the UK economy with any certainty.
But, all in all, the picture at the end of 2018 is decidedly mixed and it remains to be seen whether investment will recover and exports will continue to increase in the coming year.

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Banks, Lenders & Investors Cash Flow & Forecasting General

How crucial is SME growth to the UK economy post-Brexit?

SME growth and the challengesSMEs are often described as the backbone of the UK’s economy and it has been said that their future success will be crucial post-Brexit.
There are an estimated 5.7 million SMEs in the UK accounting for around 99% of all private sector businesses and providing 60% of UK employment. The CBI (Confederation of British Industry) believes that the UK’s economic growth depends on them.
Analysis by the Centre for Economic and Business Research has suggested that helping some 22,000 high-growth small businesses to flourish could close Britain’s productivity gap with its rivals.
On these figures one can conclude that SMEs are vitally important to the UK economy, both now and in the future, and especially their ability to compete in foreign markets to bring in the needed income to replace Europe once tariffs are in place.
Yet, it is also alleged that SMEs’ are not being given sufficient attention by the Government during the ongoing negotiations about leaving the EU.

What are the potential challenges facing SME growth post Brexit?

Investing in R & D is a significant challenge for many smaller SMEs.  Many rely on pooling their resources by using centralised research facilities for their sector. However, much of the current research funding comes via EU grants and such applications require considerable lead time.  This has already had some impact in SMEs scaling back their research plans, according to the CEO of the Materials Processing Institute.
A second worry is access to talent.  The European Start-up Monitor calculates that 51% of UK start-up employees come from outside the UK and the FSB has also highlighted that one in five small businesses rely on skills and labour from the EU.
A third concern is access to and ease of dealing with foreign markets. SMEs need help with investing in and establishing sales abroad, they are wary of the significant upfront costs and existential risks.
Then there is the SMEs’ position in many supply chains. Given the uncertainty about future post-Brexit tariffs it is worrying that the CIPS (Chartered Institute of Procurement and Supply) has calculated that 46% of EU businesses currently working with UK suppliers are in the process of finding local replacements.
On the other hand, the CBI has found from its own research that the supply chain ties between the UK and EU “could go in the other direction”. It has calculated that strengthening supply chains could add £30 Billion to the UK economy by 2025.
While questions have been raised about the UK SMEs’ preparedness for Brexit, it is difficult to see how they could make themselves readier given that there is so much uncertainty about the final outcomes of various aspects of the ongoing negotiations.
Plainly, the ability to innovate, and therefore access to R & D, to foreign markets and to attract the right talent are among the most crucial concerns.
But essentially, while there is a lot of growth potential in UK SMEs they are going to continue to be hampered in making plans unless more attention is paid both to their needs and their concerns than currently appears to be the case.

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

Economic pressure is building for a storm in the coming years

stormy skyIt is a brave, or foolhardy, man or woman who would try to predict what will happen to the economy in 2017 especially in light of the various shocks that we experienced in the US and UK in 2016. But the trends as evidence of a building financial pressure are irrefutable.
An incoming, and potentially “protectionist” US president, who seems to favour diplomacy and policy announcement via Twitter, and the wholly avoidable but now irrevocable decision by the UK to leave the EU with the prospect of lengthy negotiations before the process is complete make for a cloudy and uncertain picture which adds more pressure and most likely brings forward the inevitable storm.
The trends and pressures that give clues have been covered for some time by Alasdair Macleod, Head of Research for Goldmoney, and are summarised in his nuanced and thoughtful Outlook for 2017 that actually looks further than the year ahead for the USA. And as the cliché goes “when the US sneezes, UK catches a cold” or worse “when US catches a cold, UK gets pneumonia”.
Investor over-confidence in expectation of a business-friendly pro-tax reducing regime, a shift from monetary to fiscal policy leading to a rise in budget deficits and rising inflation are among the signs he identifies.
At the same time, although all this is reminiscent of the 1970s when interest rates soared to as much as 13%, this time it is in a climate of massive debt leading to constraints on the Federal Reserve’s ability to increase interest rates for fear of precipitating a collapse in the economy.
“Next time, when a financial crisis occurs, the problems will be more widespread, encompassing bond markets, property, equities and governments themselves. It will be ebola compared with a flesh wound. There will be no option other than to rapidly expand the quantity of money on a global basis, with central banks buying up government debt, ultimately fuelling price inflation even further,” Macleod predicts, suggesting that tangible assets will be the only protection against devaluation of fiat currencies, although perhaps not as soon as 2017.

What is the position of the UK economy by comparison?

Given that for at least the last 20 years the management of the UK economy has been based on similar “neoliberal” principles to those in the US, in our view, the UK faces a similar cocktail of risks and there have already been some signs to reinforce this, though not yet at the level to indicate an established trend. Inflation and interest rates will eventually bite on the printing of ever more paper currency or more Quantitive Easing which both amount to the same devaluation of £Sterling incidentally to 1.55% of its value in 1969.
The Chancellor’s Autumn Statement included investment in digital and physical infrastructure – a shift to fiscal measures – and the Bank of England has continued to keep interest rates at their current low level.
On Wednesday, the British Bankers’ Association (BBA) revealed that in the 11 months from January to November 2016 the rate of saving had increased by 4.8%, climbing from £19.8 billion in 2015 to £32.4 billion in 2016 so far, suggesting that people are already anticipating predicted inflation and stagnating wages.
This week the FTSE 100 reached a new record high at 7,111.69, suggesting a level of investor confidence in equities, or is it more a lack of good quality stock available for safety?
We had already learned that inflation is expected to rise in 2017 and have also had a prediction from Nationwide that house prices are expected to stabilise rather than continue to climb ever upwards.
So, the likelihood is that the UK too is facing a “perfect storm” similar to Macleod’s analysis of the USA, with the same constraints on Government’s ability to act and a consequent devaluation of its fiat currency, bonds, equities and for home owners a decline in the value of their property by 20%.
The storm may not erupt in 2017 but the pressure is mounting so we advise businesses to be prepared and despite all this, we wish you a happy and prosperous New Year.
 

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

A cautious budget from a cautious Chancellor in a dire economic situation

small business financeThere were no major fireworks in Chancellor Philip Hammond’s Autumn Statement given the true state of the post-Brexit referendum economy as revealed by the Office for Budget Responsibility (OBR).
The OBR forecast that Government borrowing will rise and revised its growth expectation for 2017 down to 1.4% from 2.2%.
As Guardian columnist Larry Elliot said: “Philip Hammond’s message was stark and clear. The result of the EU referendum in June means the economy has arrived at a reality checkpoint. Deep-seated weaknesses will be exposed….. The chancellor was candid about Britain’s woefully poor productivity record. He admitted that infrastructure was deficient.”
In many ways, it confirmed what many SMEs have been saying for some time.

Was there any good news in the Autumn Statement for SMEs?

In our wish list earlier in the week we hoped for some recognition of the importance of SMEs to the economy and wanted to see some practical commitment to investing properly and quickly in both improving the UK’s physical infrastructure such as roads and rail for freight transport, and real signs of progress on getting reliable digital infrastructure, such as high speed broadband, to the many SMEs that are based throughout the country in rural locations and small towns.
There was some of that in the promises of £1.1bn extra investment in English local transport networks, £220m to reduce traffic pinch points, £23bn to be spent on innovation and infrastructure over five years, more than £1bn for digital infrastructure and 100% business rates relief on new fibre infrastructure, £1.8bn from the Local Growth Fund to English regions and Rural Rate Relief to be increased to 100%.
It was something of a “swings and roundabouts” budget because at the same time, some measures will increase business costs, such as the increase of the national living wage from £7.20 an hour to £7.50 for employees aged 25-plus in April 2017, increases to insurance premium tax, and changes to National Insurance rates.

Will any of this come in time to make a real difference to struggling SMEs?

While small builders get a boost from the promised £1.4bn for 40,000 extra affordable homes and van delivery and freight haulage companies will breathe a sigh of relief that fuel duty will not rise, lettings and estate agencies will be hit by the decision to ban upfront fees to tenants in England “as soon as possible”.
Generally, 100% Rural Rate Relief and the emphasis on investment in local physical and digital infrastructure should help those rural and small town SMEs – if it doesn’t take too long and actually reaches those parts.
As CBI director-general Carolyn Fairbairn emphasised, the plans needed to be put into action: “That means Tarmac, tracks and telecoms being laid, and clear, deliverable timetables for major projects – only then will they act as a catalyst for investment, jobs and growth.”

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

Would leaving the EU affect businesses’ access to capital?

EU referendum jugsaw pieces
To a large extent what will happen to access to capital should Britain vote to leave the EU will be determined by the perception and subsequent behaviour of three key players: the ratings agencies, such as Moody’s; the financial institutions, such as the banks; and investors.
In March Moody’s warned that the economic costs of leaving would outweigh the benefits and may put the UK’s Aa1 credit rating at risk. The agency believes that the value of debt would be likely to reduce because of a belief that debt would be less likely to be paid although it does not believe an exit would have much effect on the credit rating of banks.
It also suggested that it was “highly unlikely” the UK’s existing arrangements with the EU in areas such as trade would be “replicated in full”.

What might be the effects on lending and investing?

Business capital illustrationThe willingness of banks to lend is also likely to be affected by a Brexit, in my view.
I would argue that foreign banks would be less likely to lend in UK, a logical consequence of what Moody’s has been suggesting.  Given that UK banks are still not generally lending to small business this combination would suggest there will be much more reliance on alternative forms of funding, and that there will less funding available.
The third key set of players is investors. While it is rational for investors to wish to protect and increase their returns, for some time now they have focused on short term gains and “safe” or asset underwritten investments which accounts for the current high values of both gold and property. The question is whether the UK leaving the EU would increase their anxiety levels and push them further into safe investments. This would make it much harder for both UK manufacturing and service sectors to get access to capital.
A final consideration is that the EU treaty would continue for two years following a vote to leave and the Government would have to trigger a particular clause, Article 50, to push ahead with disengagement. I believe that the likely consequence of this would be a rise in the cost of capital and that both lenders and investors will become more cautious, certainly until they have more confidence about the future.

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Banks, Lenders & Investors Business Development & Marketing Finance General Turnaround

Risk taking? Fat chance

This week the independent UK body researching issues related to pay, The High Pay Centre, published its annual analysis of CEO pay to reveal they are now paid 143 times as much as their staff.
Meanwhile, the Telegraph business pages report that corporate giants and PE (Private Equity) firms have accumulated capital reserves amounting to £4.1 trillion.
At the same time earnings in the UK have fallen by 10-12% in real terms since 2008, according to the Bank of England, and the Fawcett Society has released findings after questioning 1000 low-paid women that indicate that the gap between men’s and women’s pay has widened for the first time in five years.
Is there any relationship between these facts?
Possibly. Despite reports that the UK economy has recovered from the 2008 Great Recession, business and economic commentators, among them the Daily Telegraph’s Allister Heath, are arguing that it is still not sufficiently dynamic.
Heath points to a combination of factors including that Government measures introduced to mitigate the recession’s effects have frozen parts of the economy so that people fear moving jobs, businesses are not investing and so-called zombie companies are being allowed to survive well past their effective life.
He argues that a little “creative destruction” is required to really get things moving and that economies need to be in a state of permanent revolution in order to be successful.
He may have a point, but while there is uncertainty about future direction of policy in the run-up to an election, not to mention so much unfinished bank and financial sector regulatory reform, an ongoing unease about the fairness and morality of the way our economic system is structured and currently operates and so much uncertainty about a possibly stagnating Eurozone ( the UK’s biggest export market) there are likely to continue to be more questions than answers and precious little appetite for risk taking of any sort. Those who have will hang on to what they have accumulated.
Why should CEOs put their own salaries at risk by taking risks for the benefit of apathetic shareholders?

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General Rescue, Restructuring & Recovery Turnaround

UK Business Growth

There are indications of consumer confidence in the UK. One the sale of new cars where during the first three months of 2013 the sale of new cars in UK was up 7.4%, while elsewhere in Europe they were down in Germany 12.9%,  France 15.6%, Italy 13%, Spain 11.5% and Cyprus 41.6%. In March alone new car sales in UK were 394,806, against 281,184 in Germany, 165,829 in France, 132,020 in Italy and 72,677 in Spain.
This would suggest that we in UK are emerging from a long-term malaise if not depression while it would appear that Europe remains mired in a torpor with declining confidence.
So where is the engine for business growth? the above evidence would suggest it won’t be Europe which some eminent economists such as Professor Nick Crafts at Warwick University argue will be approximately 1% a year until 2030.
I don’t believe we want it to be driven by consumer confidence due to property inflation as this will become another bubble.
We need industrial, manufacturing, service and professional businesses that add value and we need export sales. These require investment in developing ideas, training people, building capacity and marketing them.
I would urge everyone to get this message across to every politician you come across as we need policies that stimulate and justify investment in such businesses.
As for the increase in car sales, how many UK manufacturers are benefiting from the new sales? The lack of a UK car industry is down to short-sighted and weak politicians who supported fundamentally flawed restructuring plans like the Phoenix Four’s failed attempt to save Rover.