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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.

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.