Finance

KPMG’s latest Retail barometer and Business Outlook survey both point towards positive signs for the economy with retail sales holding up in many areas of consumer spending and a strong rebound in confidence amongst UK manufacturers where activity, new business and profits are all forecast to increase sharply over the coming twelve months. But is the talk of an upturn justified? A bounce in the economy is on the cards at some point. Businesses were caught with excess inventories when demand for goods collapsed unexpectedly late last year – and they consequently slashed production, supplying instead from existing stocks. But once these have been depleted, production will have to increase to meet new orders. In our most recent Business Confidence survey we found that opinion is divided over whether the economy has dipped to its lowest point - or whether worse is yet to come. A slim majority - 55 percent - believe the bottom of the cycle has been reached while 42 percent fear we remain on the downward curve. We are now even seeing clients wanting to talk about their growth agenda, and how they can best position themselves to make the most of an upturn when it does arrive. The rise in confidence is certainly not due to an improvement in the conditions businesses are facing. One in three now admit to experiencing financial difficulties, the number facing higher financing costs has grown to 51 percent and more businesses are also experiencing tighter borrowing - 53 percent against 51 percent in the spring. Identifying and addressing the key risks is likely to be at the heart of funding considerations and any companies that have not yet done so should undertake a robust review of their weak points - whether management, financial or operational. The banks are scrutinising their clients in this way so it’s only sensible for management teams to similarly assess their company and take action to avoid unexpected funding shocks. The vast majority of businesses now have a strategy to reduce overheads. Our research found that four in five companies are exploring measures like improving efficiency, reducing third party spend, cutting headcount, freezing recruitment and reducing their inventory. Taking firm action to minimise costs and improve efficiency is essential given the economy may be operating at a subdued level for some considerable time. Certainly, doubts remain with most commentators on how far any recovery will be sustained beyond this essentially technical rebound. It should be remembered that this is not a normal recession. Previous advanced economy recessions over the last forty years have been essentially induced by the authorities reacting to economic overheating by hitting the brakes to subdue inflation, say, by raising interest rates or taxes. Once that job was done, policy makers could press the accelerator again. The roots of this downturn are very different. It is a “balance sheet” recession where over-extended borrowers (whose asset prices are now collapsing) and undercapitalised lenders (faced with rising defaults on the loans they have made) try, or, in many cases, are forced, to rectify their finances. Debt-laden consumers may save and pay off debt rather than spend; businesses are conserving cash rather than investing; and banks need to rebuild their capital base. Balance sheet repair will not be achieved overnight and could constrain demand growth for an extended period. Yet despite some surveys suggesting the speed of economic decline has slowed somewhat, the jury is still out on whether we are looking at a “V” shaped recession and recovery, a “U”, or a “W”, though fears of an “L” have receded in recent months.

Source: Paul Gresham is senior partner at KPMG in Gatwick paul.gresham@kpmg.co.uk 

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