NOVEMBER RESULTS 2011
This is the third in our series of quarterly surveys gauging the views of legal and banking senior restructuring executives on key economic and business issues. Respondents completed the survey during October and early November. Here we compare their views with the latest economic data and expert insight from the Centre of Economics and Business Research (Cebr).
Europe hits home
The eurozone debt crisis represents the single biggest threat to UK GDP growth in 2012. That is the view of 57% of respondents – a big change from the last survey, which identified the continuing squeeze on household income as the biggest challenge ahead. Respondents were, however, relatively optimistic about UK growth during 2012, with a rise of between 1% and 1.5% the most popular option, closely followed by growth of between zero and one percent. Cebr sides with the latter view recently confirmed n the Autumn, Statement predicting growth of just 0.6% in 2011 and 0.7% in 2012. Of those surveyed, over half felt that the eurozone crisis would evolve into either large-scale bank and debt defaults or a break up of the eurozone, with nearly 60% feeling this would lead to a double-dip recession. Pier Carlo Padoan, OECD chief economist warns that the collapse of the euro could send the world’s advanced economies into a severe recession. Economists Cebr also believe that the main impact of a eurozone crisis on the UK would be a fall in export demand and a contraction in business investment as banks’ exposure to the crisis chokes lending. It puts the chance of a double-dip recession at a significant 40%.
Inflation and exchange rates
While UK exporters have benefited from the relatively weak value of sterling since the recession, an escalation of the eurozone debt crisis could lead to an appreciation of the currency as investors take flight to perceived safe-havens. However, nearly half of our respondents felt that, come the end of the year, the pound would remain at around current levels against the Euro. Nearly 70% predicted that inflation would not fall below the BoE target rate of 2% until 2013 or beyond. Cebr is more optimistic, believing that as commodity costs stabilise, slow growth holds back retail prices and competition among retailers intensifies, inflation may fall back to 2% during 2012.
Bank lending and export growth
The results showed that the biggest driver of UK growth next year would be increased bank lending to businesses. This was the belief of nearly 60% of respondents, suggesting that access to capital is a major concern. This reflects the fact that, although banks are still willing to lend, the uncertain economic environment, weakness of many company balance sheets and the impact of Basel III mean that firms need to make strong cases to unlock funding. While Cebr expect bank lending to improve, it warns that the financial sector’s exposure to eurozone debt may constrict this. As UK businesses look to export markets to find growth, they are increasingly aware that they must venture beyond Europe, with 41% believing Asia has the most potential. According to Cebr, there are some signs that this is already happening, with UK exports to China up 13% between Q2 2010 and Q2 2011. However, with 55% of all goods shipped currently destined for EU countries, there is much more to be done.
What’s hot and what’s not?
The retail sector will encounter the most challenging economic environment in 2012, according to those surveyed. Cebr figures support this view which, it says, is being driven by the continuing squeeze on real household income. The evidence on the High Street is clear too: Habitat and TJ Hughes have failed in June; Marks & Spencer and Primark recently announced weak trading figures; and industry body the British Retail Consortium reported a 0.6% fall in like-for-like sales during October. Turning from sectors to geographical areas, the North continues to suffer most, with over half of respondents forecasting that it will experience the most business failures in 2012. Cebr believes this reflects the region’s disproportionate exposure to the public sector, which accounts for a quarter of employment in, for example, the North East compared with a UK average of 20%. As the squeeze on household spending intensifies, and the eurozone difficulties add a new layer of uncertainty, our respondents and Cebr are anticipating tough times at home and abroad.