Thursday, 24 December 2009

2010 - The Year of Growth?

I have blogged before that 'Hope is not a strategy' but it seems the only direction this Government is taking.

We have seen no initiative to cut back spend, no review, no real mention of it and no activity to make any. Yet, by 2014, there is a legal commitment to reduce the budget deficit by half. The only hope is that growth will come back into the economy and it will be enough to eat into our debt mountain. It also assumes that interest rates remain relatively low as the payments to service that debt are already forecast to be at a peak around 2013. So if growth is the plan, where will it come from, and particularly in 2010?

Retailers are still gloomy about the outlook. Households have generally started to rein back on their outlays and focused on starting to reduce their debts. Worryingly, 175% of GDP is held as principal and while interest rates remain low, the servicing is not too much of a problem, but should interest rates start to rise then severe problems will start to occur. The High Street will not be the recipient of big growth next year, that's for sure.

Many researchers say that unemployment has not yet peaked, although there are signs the rate of growth has no slowed. There is a worry here as the Government HAS to make cuts somewhere to try and service the interest on our debt and that will mean job losses in the Public Sector which has largely gone unscathed in this recession. Some predictions have put an extra half million on the current number and that will place a huge drag on benefits and lost tax revenue.

Businesses are generally holding off big investments. That is not always the case as I am working with a firm whose financials have remained good this year and is looking to grow with multiple investment opportunities this year, but their sector is generally down. That is not the general landscape - firms will be cautious about investing and the timing as there is much talk of 'double dips' and false dawns at the tail of this recession. The good news is that there is 'pent up credit' available from banks as firms have cut back on borrowing.

But the state of the inter-company lending is still very depressed. Credit insurance has taken a whipping during the Crunch and recession and overall limits are significantly down which will definitely hinder the rate of growth when the upturn comes. The firm I am working with right now has worked hard with Euler Hermes to keep their overall credit lines much the same but what has helped has been a strong policy on credit which has forced firms to pay to terms. Lengthening those credit days and decreasing cash days is not a policy that firm wants to fall back to in order to stimulate growth.

In general, fund-raising by firms has been very slow with only big banks going for rights issues mainly to boost liquidity and stave off the Asset Protection Scheme. Businesses are still keeping their powder dry.

What it points to is that there is little appetite for investment for growth right now - few companies are being bold enough to predict it is the wise thing to do. Either we are going to get a sudden massive rush for money to grow or the growth that is hoped, even preyed, for will be very slow, cautious and, in the first instance, internally funded.

You can bet your bottom dollar that such slow growth is not built into the Government's forecasts which really argues that the longer they delay making the cuts needed to balance the books, the worse they will have to be. With the Polls now narrowing, the likelihood of a hung Parliament or even a small labour victory is a possibility - given there are no concrete plans for either eventuality in terms of cuts, it may be that our attempts to balance the books will not start until the back end of next year.

That will not impress the credit agencies and it will not look good on our Bonds being as we will not be buying them in the new year with our 'Funny money'. Whichever way you look at it, this is a high risk strategy. Then again, hope is actually not a strategy.

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