IS HISTORY REPEATING ITSELF WITH DEBT. . .?

There has been a lot of discussion about a recovery of late and some economic indicators would suggest this is the case, such as an increase in employment and forecasts from the IMF which predict the highest growth amongst the big G7 economies. However, a closer look at the fundamentals of this recovery causes concern.

 

In 2013 the UK economy grew by 1.7%. When broken down by expenditure household expenditure accounted for 1.5% of this growth. This means that people are spending more to get the economy going again. Some but not all of this expenditure can be accounted for by the PPI claims paid out by the Banks. However a worrying sign is that people are spending more but wages have not increased and have actually fallen by 0.5% when adjusted for inflation. People are therefore spending money they do not have which means that debt is financing the recovery. Debt in moderation is good; however the debt to household income in the UK is currently 140% and rising. In 2008 this figure was 170%, which suggests that history could repeat it’s self. This debt is mainly driven by increases in house prices in London and Dublin. Increases in house prices only make people feel richer and encourage consumer confidence without actually increasing their spending power.

 

All is not well with SME’s in the UK and Ireland, the IMF recently released data showing that the number of non performing loans in small companies has been rising since 2009 and now stands at £800 billion across Europe. Ireland is one of the main culprits of this debt. The Central Bank of Ireland announced a total of 41% of loans to SME’s are in arrears. While these firms continue to struggle to pay down their debts they will not invest in their businesses and employ more personnel and growth, they will more than likely stagnate and eventually run out of steam. This is evidenced by the statistics which show that manufacturing actually had a negative impact of -6% on the UK economy. In a true recovery this would be more like +6%.

 

With the impending increase interest rates, this may rise to 5% within the next decade, making debt more expensive to service. What is the solution to this debt crisis? The central Bank of Ireland and England will not introduce radical measures such as those in Iceland where the government implemented a policy of debt write offs. Therefore it is up to both the SME and individual to tackle their debt problem now before they run out of steam. Debt can be restructured by the Banks on a case by case basis but it is up to the borrower to instigate these negotiations and be pro active. Specialised help is available to assist in negotiations however the first step is to take ownership of the problem and not to simply hope it will sort itself out. Once the debt is restructured growth will follow as you will focus on the future and not on paying down historical debt.

 

LOUIS WATTERS ACA
SENIOR RELATIONSHIP MANAGER