Balloons have a habit of bursting


While all eyes are on Mark Carney following the announcement that he is to stay on as Governor of the Bank of England until 2019, I wrote in August about the Bank’s decision to reduce interest rates from 0.5% to 0.25%.

I felt it was hasty and it is likely to see a quicker rebound than might otherwise have been the case. The Bank clearly got a bit wobbly about Brexit.

Evidence from our own clients points to a collective intake of breath in July and a cautious first six weeks post the vote. In fact, our SME Confidence Tracker showed business confidence at its lowest reading since 2014 in Q3.

Since then it seems that the previous equilibrium has been largely restored and official figures show that the UK economy expanded by 0.5% in the three months following the vote. Though a far cry from the frequent c4% growth of the 1990s, such growth surpassed expectations and led the ONS to suggest “there is little evidence of a pronounced effect in the immediate aftermath”.

So, was this due to heroic good judgement on the part of the Bank of England or did it have as much to do with a record British medal haul at the Olympics? My money is on the latter. The media refrained from shouting “recession” and day-after-day good things happened in Rio. The Union Jack rose and the anthem played.

While we await official figures, early indicators such as the Markit/CIPS Manufacturing PMI, point to a further rebound in confidence throughout October.

Meanwhile, the rate cut sent sterling spiraling down, reaching a new 31-year low against the dollar. Not just the rate cut, of course, the small matter of EU exit uncertainty also played a part, most notably so when Theresa May announced the timing of Article 50’s deployment in October.

Importing inflation

But with falling sterling, why cut rates?  To stave-off a downturn I suppose, but now we can clearly see the consequences. At the end of October, Microsoft announced a 22% price rise. Apple too have weighed in with a chunky uplift. This is likely just the start.

In August, data from HM Revenue & Customs once again highlighted the UK’s net-importer status, with imports exceeding exports by £18bn. Inflation has to rise as we import so much. The National Institute of Economic and Social Research (NIESR) has warned that it could rise to as much as 4% in the second half of 2017.

Exports can be boosted but it takes time to crank the production handle. By such time, it’s likely that input prices will have hardened and so the export drive may evaporate.

It’s at this stage that interest rates will simply have to rise and, due to August’s cut, the rebound is likely to be sharper than would have been otherwise necessary.

When rates do rise, I wonder what might happen to consumer confidence and consequently the orgy of new building currently devouring green fields across the South and Midlands.  What will happen to an already subdued mortgage market and the flotilla of lenders who have inflated an SME credit bubble?

An inflationary balloon is starting to strain and become more translucent by the day. Sometimes balloons deflate quietly in the corner. Sometimes they burst. Time will tell.

Brexit means Brexit. But what does Brexit mean for SMEs?


The Federation of Small Businesses and The British Chambers of Commerce met with Theresa May earlier this month as a way for the new Prime Minster to ask the SME community what they need post-Brexit. The Prime Minister has assured small businesses that cuts to EU funding will be replaced and that the SME sector would be “at the heart” of the renegotiation strategy.

But what exactly does Brexit mean for Britain’s small businesses? Can we build up an economy in these uncertain times, and can SMEs find Brexit opportunities?

We are in no doubt destined for many months of uncertainty as politicians grapple with the referendum’s ramifications. Brexit Secretary, David Davis, has hinted that Article 50 of the Lisbon Treaty (the official mechanism to split from Brussels) will be triggered in early 2017, suggesting the UK will only break away from the EU in 2019 after two years of talks.

The National Institute of Economic and Social Research (NIESR) has predicted that the UK has a 50/50 chance of falling into recession within the next 18 months whilst the Bank of England slashed its 2017 growth forecast from 2.3% to 0.8%.

I have long held the opinion that the UK economy was headed for a slowdown before the referendum outcome was known. Brexit may compound it in the short term, but I don’t believe it is the root cause. Indeed, our SME Confidence Tracker study shows that businesses across Britain were adjusting their expectations in Q2 (before the referendum).

Almost a third of SMEs said that the uncertain economic environment within the UK caused them to hold back on investment, with the proportion of SMEs expecting growth dropping by three percentage points to 45% in Quarter 2 2016.

While there is much talk of downturn, there are opportunities on the horizon for many SMEs if they look beyond our shores.

On 3 August, the CBI reported that Britain’s SMEs are expecting to boost exports over coming quarters as the UK becomes more competitive, thanks to a devaluation in the Pound. Our SME Confidence Tracker shows the proportion of SMEs investing in export activity rising steadily since 2014. This is certainly something we are seeing in our International and Trade businesses as many SMEs begin to consider export activity, particularly those who manufacture or source goods from within the UK.

While UK interest rates were cut from 0.5% to 0.25%, the Bank of England has signalled that they could go lower if the economy worsens. The worry I have is that a weakening Pound (caused in part by falling interest rates) could increase inflation and thereby necessitate the need for rates to rise more rapidly. I think there was a strong case for the MPC to sit on its hands and not cut rates. The Bank of England Governor, Mark Carney, said that the decision to leave the EU marked a “regime change” in which the UK would “redefine its openness to the movements of goods, services, people and capital”. It is this redefinition of openness that SMEs have most to gain from but also most to lose if the opportunities are not seized.

Mark Carney also announced the Term Funding Scheme, which it is hoped will help mitigate a reduction in the BoE’s benchmark interest rate for commercial banks, supporting them in their efforts to pass on lower rates to customers. The aim of the TFS (which has a capacity of £100bn) is to avoid “perverse effects on the supply of lending from the cut in Bank Rate”.

This move somewhat baffles me as I have been saying for a long time that there is too much money chasing too few businesses. It strikes me that this is a move to help bigger businesses rather than smaller players. I have also warned the Bank that the SME lending bubble will burst. Pouring more petrol on the fire may delay the moment things go awry, but my sense is that it could increase the magnitude when things do.

As Britain grapples with the realities of the economic ramifications of the Brexit vote, it will be incumbent on the Government and the BoE to work together to protect the smallest as well as the biggest players in the economy. As the Prime Minister said, SMEs need to be at the heart of the renegotiation but they also need to be at the heart of economic and business policy.

In the first few weeks of her premiership, the Prime Minster has travelled extensively to meet key political and economic figures to gauge their perspectives and concerns on the issue of the UK withdrawal from the EU. That the SME community is being given a direct line to the PM so early into her administration is a credit to her commitment to Britain’s small businesses and hopefully the sign of future things to come – and soon.

Should you loosen your belt when you’re on a diet?


Brexit relatedI have mixed feelings about Mark Carney’s speech yesterday, when he announced that the Financial Policy Committee would ease banks’ capital requirements, encouraging them to lend.

Relaxing capital requirements to ease funding availability for individuals and SMEs may work. It’s a bit like targeted QE and if we can stabilise sentiment and continue growth with a weaker pound, it may prove a masterstroke.

But I can’t help the nagging feeling that it’s a bit like the morning you wake-up after over-eating and loosen your belt or put on a size larger pair of trousers. You immediately feel comfortable but there is a little voice telling you that it’s not the solution.

So, why not?  The Bank of England frequently tell us that our banking system is better capitalised than before the financial crisis and, in the case of the very large banks, that is undoubtedly true.

What about newer, challenger banks though?  Despite ongoing lobbying to create a level playing field, many challenger banks – asset class dependent – have similar tier one capital ratios to the behemoths. And yet their portfolios are inevitably less well spread and consequently could be riskier. This is particularly the case in relation to commercial mortgages and risker forms of lending.

I was told recently by a policy maker that a “managed failure” would be good thing and that it would prove the strength of the system. This may be true. Only time will tell and a full economic cycle will be needed to judge, but I wonder whether industry commentators will be so sanguine come the day?

The purpose of a stronger capital ratio is to absorb more losses in a downturn and thereby protect depositors. To loosen capital ratios at a time of potential downturn appears at first blush to have the potential for increasing the risk to depositors.

So, is the risk actually higher? Well, in the market I see most of (SME funding), I have been warning about overheating for some time due to a swath of newer, online lenders flooding the market in recent years.

We are seeing larger cash advances, lower pricing, weakened covenants and weaker security. I’ve warned before that this will end in a bust of sorts. This isn’t to say that some of these online lenders won’t  survive and do well, but it’s a good bet that some won’t.

In my view, this was going to happen regardless of the Brexit fall out – it’s a clear case of supply exceeding demand. But will the issue become compounded now the Bank has increased supply? Maybe.

Now we have loosened our belts, the world suddenly looks a little brighter and it seems as though we have room to grow. I guess the worry is that when we expand up  to the next notch on the belt, our diet will need to be even more extreme and the correction in SME funding (and lending more broadly) may be even harder on the economy.

It is possible that the Bank have genuinely reinvented the way our economy and its banking system works, but decades of market experience lead me to be cautious.

The unholy Trinity?



It would be tempting to blame Brexit for any forthcoming downturn, but its roots run deeper. The Government seem hell bent on increasing home ownership again. Probably because it brings with it increases in Conservative votes.

So, it was with some surprise that we witnessed the Chancellor attack its existing supporters by increasing the stamp duty on Buy to Let purchases, reducing the tax efficiency of such purchases and complicating the taxation process too. If that were not enough, the Bank Of England has recently weighed in to try and stem the growth in Buy to Let by restricting people’s ability to borrow.

Why should we worry about this?  Cast your mind back to the financial crisis. It is possible to make a case that the problems were exacerbated because the Treasury, the FSA and the Bank of England openly disagreed on policy on a regular basis. This “trinity” governed our financial response to the crisis.

Despite a different sharing of power not much appears to have changed. They may get on slightly better but the FCA, Treasury and Bank still appear to communicate ineffectively with each other.

So, just when the Treasury and the Bank are effectively thwarting buy to let, the FCA are busy making it harder for people to take out mortgages. The new affordability checks are rational and may well stop the excesses we have seen before but they still have the effect of choking off demand.  People therefore need to rent. Couple the inability of some to buy or maybe now to even rent and we risk a structural shortage of housing being transformed into falling house prices. That is quite some trick to pull off!

The current greenfield development binge in Southern England is not just laying waste to the countryside but it is exposing builders to the vagaries of demand. Surely, with pent up demand they can’t lose can they?  Well if the Trinity have their way they just might. All of this might not matter if SMEs weren’t gearing up to support growing demand and if we hadn’t just voted to leave the EU. We could see a house price fall start a recession.

It is time our Trinity started to talk to each other.

Is SME lending about to catch a cold?


Amid concerns over oil prices reaching a low of $10 a barrel, stock markets around the world tumbled yesterday. At 4pm (GMT) The Daily Telegraph reported that £60 billion had been wiped off the FTSE 100 as the day’s trading looked set to close 4 per cent down. As market analysts assess the impact, many will point the finger of blame at volatility in the East.

However, the catalyst isn’t just one thing but many: a number of adverse factors, combining to send ripples through global financial markets. Slowing growth in China is clearly one such factor, but there are others.

The International Monetary Fund (IMF)’s downgrade of its global growth forecast, residual effects of the Eurozone crisis, the tumbling price of oil and other commodities and the knock-on effects on markets such as Russia and Brazil are leading to significant investor jitters.

But did we see it coming?

Unfortunately the answer is most likely yes. Alongside others, I warned of the potential of another recession throughout the past year. We have learned little from the 2008 global downturn and I believe it’s only a matter of time before global economic commentators return to banding around the dreaded ‘R’ word.

So what next?

The Governor of the Bank of England has signified that an interest rates rise is likely to be delayed until later in the year (if at all in 2016). It’s clear that Mr Carney is also concerned and is keeping the one remaining – albeit diminished – monetary policy instrument up his sleeve in case things take a severe turn for the worst.  And unless markets recover, there’s a significant possibility that the tides will turn towards another recession. At this stage, UK SME lending will start to catch a cold, as banks begin to retreat and investors pull back from market-based lenders.

Over the past 18 months there has been massive overheating in the supply of finance to SMEs and if UK growth reverses, the loosening of security criteria amongst lenders, coupled with reduced margins, will end in pain. It always has in the past.

This time there is a new breed of lenders, many of which think the rules have changed. However, the vast majority are yet to see a full economic cycle through.

I believe that only those funders who have weathered the storm and come out the other side in the past will succeed in a downturn.

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