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Latest news from Key’s Market Place
Is it a
U, a
V or a
W ? These are
questions that the economists, the media, the Bank of
England, the Prime Minister….. and the high street banks
are all asking about the current recession!
No one really knows, including the
economists. We often make the observation to our clients
that the great majority of economists fail to predict
economic outcomes the great majority of the time. As
evidenced by the regular, almost monthly changes in
economic forecasts by the main institutions. One could
argue that the world economy seems almost to be like the
weather – subject to “Chaos theory” , and being
predictable probably only a week ahead. We understand
the basic rules and drivers, but there are so many
variables that medium term forecasts are altered every
time one of these variables changes.
What we do know is that for at
least the last two hundred years, there have been
recessions, many of them triggered by crisis in the
Banking and financial systems. We also know that it
takes longer for an economy to recover from a recession
triggered by such financial crisis – on average about
four years. And whilst the green shoots have a few
leaves on them, such as in the form of a few months of
house price growth and recovery in both services and
manufacturing PMI indexes, don’t be too surprised if the
recession looks like a “U” or even a “W” rather than
what we all hope for – a “V”.
It shouldn’t be forgotten that here
in the UK, there is an election just around the corner.
No decisions to tackle the huge public spending deficit
will be taken prior to then, and Mr Brown will be doing
absolutely all he can to stimulate the economy to make
our recovery look like a “V” !! But some tough
decisions remain ahead for whomever comes into power,
and a reduction in public spending will undoubtedly have
an impact. |
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And what will happen to interest
rates ? Will they stay low ? No one knows what the
medium term consequences of the £125 Billion on
quantitative easing will be – it takes about 18 months
for the economy and in particular inflation to react to
the consequences of changes in monetary policy. The Bank
of England and the U.S authorities have recently
indicated their intention to keep rates low for a
protracted period, but in reality, if inflation shows
signs of taking off, it will be hard to keep rates low.
Our advice to businesses continues to be to adopt a
rigorous interest rate hedging policy for any
significant debt exposures, particularly if your
business is highly geared. Leaving your debt unhedged is
a massive medium term gamble.
So with all the questions and
observations posed above, what is the outlook of the
high street Banks ? Well I think it is fair to say that
the Banks have a similar view of the UK and the world to
our above observations – one of uncertainty. This
uncertainty continues to impact on their lending
policies, and given the experience of past recessions,
we think their lending policy will continue to be tight
for some considerable time to come – probably for a
couple of years or so.
The good news is that there are
still some Banks who are trying to increase market share
at the expense of those who are really struggling – we
know who those Banks are. Preparation prior to
approaching any Bank is paramount - your case has to
look good ! Here at Key we ensure that your proposal
does look good. |