CRAIG ALEXANDER RATTRAY explains why consumers are unlikely to splash the cash as the economy reopens
Bank of England governor Andrew Bailey and chief economist Andy Haldane are among those who, in recent weeks, have been prophesying a huge spending spree as we emerge from months of lockdown. Their belief is based on the £140 billion that consumers have saved by not commuting, taking holidays or visiting restaurants and pubs.
Without being overly pessimistic and trying to dampen such enthusiasm, I believe that this is highly unlikely.
Uncertainty continues to prevail over new Covid-19 variants, the ability to travel overseas and the ongoing lockdown restrictions, though these are being phased out.
In previous articles I have written about how the debt burden of companies has risen substantially during the last year on the back of government-sponsored loan schemes and alongside deferred obligations to HM Revenue and Customs.
The recoverability of a high proportion of this debt is highly questionable and I have always believed that there will be significant defaults. Add to this, the forthcoming end to the Job Retention Scheme and the challenges of emerging from a year of reduced demand for many businesses.
Many businesses often struggle more as we emerge from downturns than during the downturn itself as working capital demands are mismanaged and not forecast. Often businesses are unable to cope with the pressure on working capital as customers receive credit, but employees and suppliers need to be paid quicker. I expect the insolvency profession to be gearing up for a busy time.
Some of this pessimism was confirmed last week by the report from Begbies Traynor which revealed that there has been a 45% year-on-year rise in businesses showing early stages of financial distress and that 38,000 Scottish businesses are affected.
The quarterly Red Flag report also confirms that “significant distress” in Scotland has increased by 32% since the previous year and in all 22 of the sectors identified. It appears that no sector is immune.
Surely, we should not be surprised by this.
Yes, formal insolvencies, decrees and court actions have decreased, but that appears to relate more to lack of court time and delays in proceedings than indicating that the financial picture is any better.
As companies become insolvent, lay-off employees and fail to repay debts, it is inevitable that larger job losses will follow and unemployment will rise.
After the financial crisis in 2008/9 it took five years for the UK to return to pre-crisis levels, although indications are that we will return quicker than that this time. However, I find it hard to believe some of the reports stating that we will return to such levels within 12 months.
So, from a business ownership viewpoint or from an individual employee perspective, why would people choose to go on a spending spree and diminish any safety-nets or rainy-day savings that have been hard-earned and saved over the last year, whilst facing ongoing uncertainty?
It seems obvious to me that most people will act cautiously and conservatively and temper the attraction of spending freely post lockdown whilst there remains uncertainty over jobs, business outlook and what happens next.
I expect many business owners of a certain age will be looking towards retirement and not having to manage their way through more challenges and uncertainty.
What should we do?
I believe that we should focus on the outlook and cash requirements both from a personal and a business point of view.
We must understand and plan to have any chance of managing through the coming months and be able to take advantage of opportunities as they arise.
Perhaps a significant recovery will materialise. I hope it does.
Regardless of that, I recommend for businesses and individuals alike, that there needs to be a clear understanding of the cash requirements going forward.
Only then will there be more confidence to allow us to confidently engage in spending sprees.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays and his Cash Flow Tips appear every Thursday