Don't wait for the recovery bus to arrive...
Posted by: John Toppin - Nomizon Associates
Date added: Mon 14 May 2012
In 2007 New Century Financial, a sub-prime mortgage specialist, was put into bankruptcy - precipitating the credit crunch.
Economic cycles usually have a peak to peak or trough to trough span of 7 years. So isn't recovery is well overdue?
UK gdp is now 15% below the trend level indicated before the credit crunch. That is a big gap.
So why is this recesssion different to a normal businesss cycle?
Here is my economic analysis.
Banks: There is insufficient credit liquidity in the system.
Normally, a recession bites in industry first then hits banks. This time the banks were first in. Because they were so badly damaged and lost capital, the banks were required to build up their capital ratios.
The Government tells the bankers to lend to business but they can't because of the need to repair capital. This is slowing down any recovery.
Quantitative easing has held interest rates low, so banks can't attract the level of savings deposits to repair their balance sheets so they can get lending.
The requirement on the banks to build up capital also means they can't afford to be honest about writing off bad loans to business. This means that there are many businesses being sustained by banks that would normally have gone bust.
The Euro: Almost half of UK exports go to Europe. The euro crisis has depressed UK export sales to Europe.
Most of the countries using the Euro should not have been allowed to join as their economies didn't pass the tests.
Massive overborrowing and spending (often property led) was undertaken - especially in "poor" economies such as the PIGS.
The hapless governments in these countries are struggling to balance public spending with tax receipts...after all they are not used to it.
The mainly southern European's are stuck with an exchange rate that does not encourage recovery.
Problems in southern Europe mean that Germany's sales to them are now depressed.
If you want to grow your business in this environment, you really need to expand market share - growing with economic activity won't do the trick.
John Toppin - Nomizon Associateshttp://www.nomizon.co.uk
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