Monthly Archives: August 2013

Why aren’t the banks lending more?

I hear from business owners and advisors how badly the banks are behaving towards the small business sector, how little money they are prepared to lend and how tough their credit committees are on new applications.

Banks are being told to rebuild and strengthen their balance sheets, but on the other hand to increase their lending. One way to strengthen the banks’ balance sheet is not to lend so much….

Banks don’t make much profit lending money to small businesses.  Let’s say the bank can borrow at 3% and lend to the small business at 7% so they will make 4%.

Over the course of a year, on £100k of lending, the bank will make £4k.  That means an awful lot of good loans are required to make up for one bad loan, and it is no wonder the banks are cautious

Quarterly Economic Update – June 2013

This first of a series of quarterly economic updates is my personal view, based upon many years researching and reviewing the work of others “standing upon the shoulders of giants”

This commentary seeks to provide guidance over a 3 -5 year timescale.

Europe

As I write the Eurozone problems rumble along. It seems unlikely that there will be a dramatic climax to the turmoil, with less and less probability of a Euro breakdown or any single country exit. The divide between Germany and the rest, in terms of economic performance, is becoming greater.  There is a (very small) possibility that Germany could “go it alone” and return to the Deutschemark, but I am sure wiser heads will prevail. A lot of German economic growth has come from sales to the Eurozone, unhampered by the strength of the Mark.

Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 3% in year 2016, but individual countries will perform at markedly different rates. All of the Latin countries will be subject to further political instability and potentially further investor / lender shocks. Germany is likely to be more stable, with growth gradually improving from 2013 – 2015/6, perhaps to as much as 3.5%. France may well be in steep decline by 2014 but that is heavily dependent upon the political situation; I do not see significant upside potential.

Italy is likely to face yet another election in the near future; given how divided public opinion was at the last election (30% for a comedian, 30% for a philanderer and 30% for a nonentity) it seems unlikely that the strong leadership required to reform business and political structures will arrive. Despite this, Italians are used to weak / no government and growth of 1.5 – 1.8% should be achievable in 2014 with gradual improvement through to 2016.

Smaller countries, particularly those in Eastern Europe, offer real potential for growth. Ireland appears to have weathered the crisis and has a positive outlook, and general acceptance of their fate (albeit still with some political upheaval) is appearing in Spain, Greece & Portugal.

UK

At the time of the crisis in 2007-8 the financial services sector was a large part of the UK Economy and continues to be important.  Growth in this sector is hampered by the need to comply with latest banking regulations and capital requirements, couple with public opprobrium for the sector.

Other sectors of the UK economy were and are affected by the impact on the financial services sector, most notably house building and construction.

I see a two speed recovery taking place, with services businesses requiring & using little capital returning to run-rate level of growth of 3% but the economy as a whole held back by construction and other sectors where access to and demand for finance plays a key role.  Many businesses are holding back on investment, waiting for an improvement in the overall picture.

Problems of low growth in the Eurozone are not helping, and wise businesses will be seeking to export to other markets.

USA

Prospects in the US are positive, largely powered by shale gas (pardon the pun) but also by the corrections to spending, borrowing and taxation implemented by the fiscal cliff. Clumsy as those corrections are, and awkwardly implemented, they are moving to addresses the imbalances in the US and with a stable (if ineffectual) government combined with a young well educated population, prospects for growth are good, and we could see growth of 3.5 to 4% in 2015/6

BRIC

Brazil & Russia are benefiting from significant natural resources and will show good growth in the mid to medium term. The longer term depends upon political stability and the willingness to develop infrastructure and eliminate corruption.  Both economies suffer from the disadvantage of a large population speaking a language other than English, which is now and will remain the defacto language of business and the internet. Neither country has a culture of educational achievement, or an educational establishment to support the development of a highly skilled graduate level workforce.

India benefits from both the education and the use of English as the language of business / commerce, but is hampered by poor infrastructure and a bureaucratic legal and administrative system. The infrastructure problems are compounded by a complex political system with national and regional bodies operating in their own interests.

All 3 economies are still economies of promise, but not yet of delivery, and that seems set to continue for the foreseeable future. Growth rates could easily be in 5% or more, but subject to shocks and upsets.

China is the powerhouse that is going to drive the world economy in this timeframe. There are significant stresses, both social and political, but the central government is making the right noises and very careful to cool the economic growth when it appears to be getting out of hand.  The social stress most likely to cause problems is the move of the populations, especially those of working age, from the country to the city. Parallels can be drawn with England in the mid-19th century and America in the early 20th and the rise of the urban poor. China appears to have learned some of the lessons of history and is making great efforts to provide the infrastructure to improve mobility, including the development of new cities in less populated areas.

Growth rates of 7-9% are most likely

“Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it. The glaring exception is of course Myanmar, the former Burma, but even there the path to democracy seems to be the chosen road.

The political risk in this area is conflict with North Korea, which would heavily affect South Korea.

Growth rates could be exceptional at up to 10%

Japan

Japan is often ignored / written off in the commentaries but is still one of the world largest economies. Good opportunities exist in many sectors, but overall growth rates will be hampered by legacy issues, much as in Europe.

MENA

The Middle East & North African region is one of the hardest to read. Political turmoil in North Africa seems likely to last for some considerable time and the Gulf States, whilst endowed with vast natural resources and not immune to the conflicts in surrounding countries and the continued emancipation of their populations. Growth rates of anything between -2% and 5%

Australasia

I suspect the story can be summarized as “the party is over” at least for now. Australia has benefited greatly by shipping commodities to China, but that seems to be cooling off, perhaps as a result of Chinese investment in Africa’s mines. Growth rates of 1-2%

 © Tim Luscombe June 2013