Outlook And Opportunities For 2012

Fears over the Eurozone and the possibility of a double dip recession have taken growth plans off the agenda for most businesses. The continued low interest rates and the uncertainty over equities make it difficult for investors to generate a return on their capital. Investor confidence is low as the market is perceived to be very risky at present. Many businesses are either sitting on cash and waiting for an opportunity to arise or are working to reduce their debts. 

Paying off debts is clearly a good priority at present. However, the smart businesses will be looking to make the most of cheap acquisitions and low interest rates. Several UK businesses have been braving the economic uncertainty to buy rivals and invest in bargains to be had. Business confidence is slowly improving and further opportunities could arise should the Euro devalue further. 

Unfortunately small businesses are having to fund the bulk of their investment activities internally. Bank of England figures reveal that net lending to business fell by £9.6 billion in 2011 due to a lack of confidence in both the supply and demand sides of the market. However, for those of you with less cash to spare, the Government’s National Loan Guarantee Scheme aims to reduce the cost of loans for SME’s by 1% and should help smaller businesses. The Mayor of London has also announced a new apprenticeship scheme for small businesses who could be eligible to receive £1,500 should they participate in the scheme. Other schemes include the Government New Buy scheme in the housing sector which has been a benefit to contractors and freelancers.  Keep an eye out for these schemes as every little helps and a small boost could help small businesses to expand in these difficult times.

Emerging Markets To Drive Economic Recovery

The global recession has begun to affect everyone. Europe is in crisis with fears over a Greek or Spanish exit. The US is experiencing economic slowdown and now China, Brazil and India have begun to feel the effects or the Euro crisis with a slowdown in growth. 

Many economists including Andrew Sentence of the Monetary Policy Committee believe that both the UK and Europe will undergo a period of consolidation over the next few years with little growth. Economists are looking to the emerging markets which are forecast to continue to grow, albeit at lower rates of growth, and become dominant forces in the global markets over the next few years. China in particular is forecast to continue to grow and could overtake the US as the world largest economy within 5 years time. The economy in Brazil is also forecast to grow over the next few years as the country will benefit from its large pool of natural resources, together with a further boost from hosting the next world cup and Olympics. Investors and small businesses will be wise to look to invest in these economies as a source of growth over the medium term.

The last time the UK was in this recessionary economic cycle was in the late 1990’s where the country experienced disappointing growth and high inflation. The emerging markets continued to show strong growth during this time, especially in Asia. The recession in the 1990’s was caused by growth in the 1980’s backed by financial exuberance and borrowing which was not sustainable and the market eventually crashed in 1998. There were several factors involved including the internet bubble and the financial crisis created by the US sub prime loans.

The current financial crisis is much the same with a number of countries and banks taking on excessive levels of debt. China may be experiencing a slowdown at present but the economy is still growing albeit at a slower rate (China reported growth of 7.6% in the Second Quarter of 2012). This will continue to put upward pressure on oil and commodity prices.

A European crash is inevitable but the UK should avoid significant damage due to its history of strong economic policy. The UK continues to give positive signals to the market through the current economic policy of cutting the deficit. UK employment has also been resilient during times of economic depression. The fact that the UK is seen as a safe haven in Europe could also prove to be a benefit should companies and investors look to move their funds out of Europe in the event of a crash. Whilst the UK should not suffer unduly from a European recession, we can expect very low growth over the next few years. 

The US on the other hand has a strong manufacturing base and is well poised to grow its way out of the current recession. It is likely that the US economy will grow slowly over the next few years but should recover more quickly than the UK and the rest of Europe.

Euro Devaluation Expected

Many economists including Belsize Accountancy, expect the most likely solution to the Eurozone crisis is to devalue the Euro. The European banks are in dire straights, especially the banks in Greece, Spain and Cyprus which are technically bankrupt. The banks in Ireland and Portugal are also facing difficulties. The latest €10m Euro bailout of the Spanish banks is simply forestalling the problem until a solution can be reached. The fact of the matter is that the banks have accumulated unsustainable amounts of bad debt and until this is written off and their processes are improved the banks will be in the same position once the bailout funds have been spent. 

It is estimated that it will cost at least €2 trillion to shore up the weaker European banks and quite simply, nobody is willing to pay up and fund these inefficient banks. Germany does not have the will nor the resources to bail out these nations for much longer. Also, given past experiences, the European ministers are unlikely to reach an agreement and implement a clever plan to restore the European financial sector. So far the only solution has been to throw money at the problem in the form of bailouts but this is clearly not sustainable and is not providing a long term solution. 

The most likely alternative therefore is a devaluation of the Euro, possibly in the region of 20%. The would allow the weaker European Nations to export their way out of trouble and will also provide a boost to Germany as a major exporter. 

We would advise businesses to take measures to reduce their exposure to the Euro and to plan for potential business opportunities that may arise following the potential devaluation. If you require expert financial advice, feel free to contact Belsize Accountancy at info@Belsizeaccountancy.co.uk. We are expert advisors for contractors and small businesses.