News Category: Economics
A number of recent surveys have revealed a sharp rise in the number of business failures and a fall in the level of business confidence and optimism in the owners of small and medium sized enterprises.
The Bowmark Optimism index tracks how positive company directors feel about the future of their business operations. 70% of those recently surveyed noted that government legislative intervention was an obstacle to growth and two-thirds thought business taxation was as an obstacle for doing business. The report also highlighted a sharp rise in the cost of energy businesses consume, as well as a slowdown in revenue and profit growth. Lastly, one quarter of those surveyed, mentioned that the availability of credit has worsened due to the credit crunch. The survey also reveals that companies expect to cut back on staffing levels in the future. There is an air of pessimism and negativity amongst business leaders, as most seem to expect things to get worse before they get better.
Meanwhile, Experian the credit referencing agency, recently noted that there has been a 15 per cent rise in the number of business failures in the last six months (compared to this time last year), as trading conditions become tougher. In particular, there has been an 81% increase in property related businesses are failing. Unsurprisingly, this has been due to the cooling down of the housing market and the collapse of the buy to let investment sector. The report also noted a 125% increase in the number (typically banking led) receiverships and a rise in company arrangements and administrations. A similar report from Equifax noted on the 29% jump business failures compared to this month last year. Failures occurred across all what vertical industry sectors.
With nominal growth expected across most industry sectors, it is becoming increasing difficult to maintain previous levels of margins, especially while sales remained flat or falling and expenses continue to climb. The rising cost of raw materials for small businesses is becoming a major worry. This is forcing some businesses to cut back on staffing levels and prevent inflation linked to pay rises. Indeed, some larger house builders and commercial property companies, such as Taylor Wimpey and Barrat, have already announced job losses and profit warnings, as their share prices collapse.
In the corporate sector there is also more bad news. The Bank of Scotland has posted a £691 million loss, which was due to a £6 billion credit write down. While the troubled bank of Northern Rock had to go cap in hand to the government, who provided £3 billion pounds of the private equity capital for shares; in effect exposing the taxpayer too a potential loss. Embarrassingly, the Rock continues to have to repossess properties from its own lending book who took out 125% mortgages just before the credit crunch hit around one year ago. There appear to be no light at the end of the UK domestic mortgage market at the moment; the liquidity stagnation of the wholesale money markets is continuing and is expected to have to carry on throughout 2009.
The UK domestic housing market continues to slow. HBOS has recently reported an 8.8% drop in prices compared to one year ago. There has been a 70% drop in number of mortgage approvals over the last year. The Land Registry stats show a 80% fall in new homes sold since this time last year. While the Council of Mortgage Lenders today revealed a future 40% jump in the number of repossessions in the first half of 2008. This represents the highest level of repossessions and 12 years. Almost 19,000 homes were repossessed, as borrowers failed to keep up with mortgage repayments. Despite the recent announcement of from the Bank of England that it would maintain interest rates at 5%, mortgage lenders continue to charge borrowers at a higher interest rate (compare the base rate), in order to offset the increased risk of bad debt form homeowners. It shows that mortgage affordability continues to be a serious issue for homeowners. It also poses a dilemma for policy makers, who desperately don't want stagflation before a forthcoming election. This is having a big impact on consumer confidence and a knock on effect on high street spending.
While huge multinationals can weather the financial storm by closing branches, laying off staff and slashing expenses, the same cannot be necessarily said for small businesses. Cash flow remains the number one priority for struggling and pessimistic business owners. In all likelihood, small businesses will have to whether a recessionary environment over the next year.