Let’s do lunch…..

Last week I had lunch at the Bank of England. I’ll just let that one sink in a moment. Actually it was the day that the Monetary Policy Committee decided on a second round of quantitative easing, although I can’t claim to have influenced the decision even though I visited the room in which they made it. The committee of course were long gone by then, and all efforts to get an inside line on their discussion by looking for indentations on the notepaper left behind were in vain…..

OK, a moment to show off perhaps, but like most things I do it was an opportunity to share knowledge and find out what is really happening in the world of Enterprise Britain. The reason for my lunch was a meeting with Peter Andrews, Greater London Agent for the Bank of England, alongside other members of the London Local Chambers Forum. The Bank uses agents like Peter throughout the UK to gather anecdotal evidence to add to the swathe of numerical and statistical data used to monitor the economy.

As you can imagine, when a dozen or so businessmen committed to success get together in a room strong views and opinions fly out at a rate of knots. Regulation, planning, support for construction, infrastructure and education all came under the spotlight. Unsurprisingly the banks got a bashing for their continuing reluctance to provide the finance required by SMEs in the current climate. There was some concern about inflation and its potential impact on pay settlements which to date have been subdued as employees focused on keeping their jobs.     

One of our number asserted that what was happening was more of a restructuring rather than a recession based on a shifting of the economic balance of power from west to east, and that solutions needed to be in place to address this fundamental issue above all else.

As the penultimate contributor I noted that little attention was paid to the level of underemployment in the labour market, particularly amongst older professionals who have become freelancers as a result of being made redundant, which was a tremendous waste of talent. I also made the point that it would be nice if the large corporates who are apparently hoarding £60billion in cash at present could use some of this to pay their smaller suppliers on time. The impact of this on SME working capital would be significant, more I would venture to suggest that any increase in the availability of bank finance.

Throughout all this, the man from the Bank of England took copious notes, smiled, empathised, made fleeting comments, sought clarifications and picked up on points that were consistent with what he was hearing from other sources.

Hopefully what he heard from us will make it back to those with the power to deal with the macro economic issues that appear to be putting recovery at risk. For many people 2011 was shaping up to be a good year until the economic situation started to deteriorate during the summer.

In spite of all the gloom it is clear that companies large and small are getting on with life and trying to grow their businesses. It would be a shame if all these efforts went to waste because the policymakers were unable to do their job. We are playing our part. One hopes they realise this in London, Washington, Brussels, Frankfurt…….

It's Berlin Time....

This week sees MPs (well those who can be bothered to turn up on a Friday) debate the idea of the UK moving to “Berlin Time”. Tory MP Rebecca Harris will be introducing a private members bill which is aimed at moving the UK permanently one hour ahead i.e. on the same time zone as most of continental Europe. This could, according to each side of the argument, either provide the UK, particularly the south east, with lighter, safer more enjoyable evenings, or plunge Scotland and all points west into a spiral of gloom and depression as mornings stay darker for longer.

Berlin of course is the capital city of the country which is currently Europe’s strongest economy. News emerged last week that German economic confidence has reached the highest levels since records began post unification in 1990. Indeed Germany’s economics minister Rainer Bruederle has gone on record as saying that “full employment will soon be possible”. This is a remarkable turnaround for an economy where unemployment has been stubbornly high for much of the past decade, and that fell off the end of a cliff at the end of 2008. Much of Germany’s current economic success is attributed to strong export performance, although domestic demand has also played its part.

The German economy has always run on a strange mixture of entrepreneurship and regulation. The typically family run "mittelstand" companies, enterprising SME businesses which focus on innovative and exportable products based on a strong commitment to research and development and long term planning, sit alongside some of the most fearsome employment protection systems in the world. And yet at the moment it seems to be working extremely well.

The situation in Germany is not perfect, and clouds exist in terms of the euro crises, public spending cuts and domestic banking risks. It would also help if they were to borrow and spend more as consumers. However, as the UK looks to rebalance itself as an economy which is weighted towards export and investment, rather that the consumption and borrowing model that we have grown used to, marrying Germany’s longer term approach to developing and making high value products that people want with the UK’s strengths of flexibility and dynamism looks like a winning combination. 

Something to consider maybe as we prepare for our usual pre Christmas splurge prior to embarking on an uncertain 2011? We don't have to be on the same time zone.....

Lessons in debt…..

I remember when I got my first credit card. I acquired it when I opened my first bank account as a student. The credit limit was £100, I used it sparingly, and I always paid back the full amount. Of course in those days students received a grant and I was able to deposit mine in a building society account and gain some additional income as the grant balance ran down over the course of a term (those were the days when savers also received a decent rate of interest!).

The upshot of all this was that I was able to emerge debt free from my student days, and save sufficient money to put down a deposit on a flat. A mortgage was therefore my first real experience of debt. However the systems in place at that time regarding multiples of income and percentage of loan to value meant that it was manageable and affordable. I continued to pay back my credit cards on time. Like my parents I believed that debt was to be used sparingly, was only for sensible reasons, and should be comfortably paid back within a reasonable period.  

The reason for the above wave of nostalgia is Lord Browne’s review of higher education funding which was published last week. This raised the prospect of students emerging from higher education with a level of debt that would have been unimaginable to my younger self. On top of this they will probably have an overdraft, credit card borrowings, a car loan and other debts to which they will then be expected to add a mortgage.

The rise of debt fuelled consumption by both individuals and government is blamed by many for the economic struggles that we now face. And yet are we really surprised at this, given that young people are effectively educated to believe that a mountain of debt is a fact of life, and that paying it back is something that will have to wait until resources allow?

There is no easy answer to this. Higher education has reached the stage where it is impossible to fund it without student contribution. Too many students and too many courses are spreading resources far too thinly. And yet I can’t help thinking burdening young people with this level of debt is sending out the wrong message, potentially discouraging able students, and thus storing up even more problems for the future.

Not Just A Swallow?

It would seem that those on green shoots watch have had a whale of a time over the past couple of weeks with a number of positive bits of economic news emerging, as well as the apparently successful G20 summit in London.

The banking situation seems to be improving, with the news of record profitability for Wells Fargo in the US, and reports of a marked increase in the amount of loans being written under the Enterprise Finance Guarantee Scheme.

There are continuing signs of relatively robust consumer activity, and with property prices seemingly within sight of the bottom, cash buyers are interested again. A 90% mortgage product has recently been introduced by HSBC which could provoke a small boost to the housing market.

Also, although they have significantly increased, insolvencies and repossessions have not reached the predicted levels.

Then there are the many people who are securely in work and have been benefiting from significantly reduced mortgage payments. Once they have paid off some debt, they will be looking to spend again, although without necessarily borrowing to do so.

All the above would seem to support the idea that there are some signs of confidence returning, and as we all know it is confidence rather than credit which will drive economic recovery.

This blog has made no secret of its belief that the economy, or more pertinently the ordinary people and businesses that inhabit the real economy, is more resilient and positive than the various media outlets have given it credit for, and that many businesses have acted decisively and imaginatively to combat the impact of the downturn (one reason perhaps that the retail apocalypse predicted for the quarter rent day of 25th March did not come to pass was that fact that many businesses had already negotiated better deals with their landlords).

However there are still a number of macro economic clouds on the horizon, including the number of large corporate refinancings that are due over the next year or so, the state of government finances and the medium term action that will be required to improve them, and the feeling that for all the talk of deflation, the underlying inflation rate remains at a persistently uncomfortable level. Unemployment is also likely to increase further during the rest of the year.

As Aristotle is credited with saying “One swallow does not a summer make”. The selection of positive news above does not mean that the current economic problems have gone away. Careful planning and flexible use of resources remains the key, whether it is developing a new product, investing in new capacity or taking on new people, particularly at a senior level. There are some reasons to feel good at last, but that does not mean caution should be thrown to the wind.