Usually, it is the 'real economy' that brings the financial services sector into recession, not the other way round. And the current problems with financial services companies may be completing this cycle; it could, however, be the downward spiral into something worse.
According to the FPB's macro economic adviser, we are likely to already be in a national recession, although it is unlikely that this will be confirmed officially for a number of months.
With the collapse in consumer confidence, high levels of personal debt and the national obsession with house prices, it is unlikely that consumers will maintain their previous levels of spending. Business confidence has been falling for a while; hence investment rates are likely to decline further due to the lack of confidence and the turmoil in the banking sector.
For small businesses, the current business climate is highly varied, depending on local conditions and industry sectors. Some businesses are reporting that the conditions they are facing are the worst they have seen for more than 20 years, while a significant number of businesses do not seem to be hampered by the current economic climate.
Since the Small Business Research Trust (SBRT) first raised concerns in its quarterly survey in the first three months of 2008 and the Chambers of Commerce raised the spectre of recession in the second quarter of this year, September was always due to be the next focal point in monitoring the business climate to see what would be the reaction of owner-managers when they took stock after the summer holidays.
Whilst the indicators are by no means positive, they are not as bad as was predicted. Although the picture is changing on a weekly basis, wage inflation is relatively stable and petrol costs have peaked. The impact of the banking crisis has lead to an increase in the cost of borrowing and access to finance, but for the majority of small businesses this is not unanticipated. This has been the case for the last 12 months and there is evidence that proprietors have changed their plans accordingly.
The next stage is the Government's reaction to the crisis, which so far has been to ignore SMEs (which represent 99% of UK businesses) completely. A clear strategy needs to be put in place to deal with this, with the Government looking to counteract its economic cycle and restore both business and consumer confidence.
The Pre-Budget Report will be critical for defining the length and depth of any recession. The FPB is currently putting together a list of issues that we feel need to be addressed, in order to help small businesses, based on the results of our latest quarterly Referendum ballot and the advice of experts. Yet even matters such as the changing of current fiscal rules, which the FPB considers as more important for SMEs than a short-term cut in interest rates, have their problems as the Treasury will be redefining the rules from a position of weakness and the markets are unlikely to be convinced that the changes are to do with economic probity rather than political advantage.
The Pre-Budget Report will have a major impact on the decision of proprietors as to what action they take when they next take stock of their businesses. If the overall report is positive for businesses in simplifying regulatory requirements and reducing the cost of doing business, then there is a chance that the recession could still be shallow. Otherwise, the impact on the UK economy could be devastating. In a worst case scenario, some owners could simply close their businesses within weeks.
The other key dates will be when businesses have their accounts audited in December and March. The figures from these may then make hard choices inevitable, particularly when the cost of employment and compliance with employment law is taken into account.
A tendency of the media is to exaggerate a distrust of the current administration which, combined with the natural caution of proprietors to protect their businesses, means that a low point of April 2009 for the downturn is not unreasonable. It is, however, likely that the economy will not grow significantly until mid-2010. By this stage it is expected that the current financial issues will have been resolved but the cost of this to small businesses will be unclear.
After ten years of growth, some form of economic decline is useful to clear out businesses that are not viable. Yet the indications are that the early prediction from BDO Stoy Hayward – that 20% of businesses could go into administration, including a significant number of structurally-sound businesses – remains as good as any in the current economic turmoil.
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