08/11/10

By Julien Tavener, Clifton Asset Management

Doctor to patient: “Don’t worry; everything is going to be OK.”

Patient to doctor: “But what is the priest doing here?”

Every day we get a little bit better. We know this because things around us appear to gradually return to normal. Like someone recovering from a bad accident, we get out of bed and take some tentative steps toward the doorway. This doesn’t mean we are well. It just means we are better.

But the doctor on his rounds knows not to rely on anecdotes. He is looking for facts. Facts that inform him and guide him to form his opinion.

What about if the patient’s vital signs looked like our present economic situation? An unemployment rate of 7.8% with bank base rates at less than 1% for more than two years. What should he make of the fact that the Treasury has had to pump £200 billion into the UK economy and still be talking about needing extra stimulus? If he looks harder he will find even more of concern like 10-year Government bond yields at less than 3% and an out-of-control budget deficit.

Which ever way you look at it, this patient might be taking some tentative steps towards the door, but he is still hooked up to the drips. And what of the doctor’s prognosis? Surely if things are getting better, no matter how slowly, this is a good thing.

Wrong. Human nature tends toward complacency. At the very point in the recovery that we should be the most vigilant, the most careful, we are instead likely to be the most relaxed. Our internal GPS is now pointing toward home and for the first time in a few years we can start to plan for the future.

For Small Businesses, the next 12 months pose the most threat since the onset of the economic crisis. The desire not to be left behind in any phantom recovery is strong. The siren call of easier credit, the temptation to stretch that little bit more. These are powerful motivations. But little has really changed. In the same way that the patient remains on the drip, business remains unconsciously reliant on the support that the Government and Treasury have been giving us all. Pumping money into the economy and suppressing interest rates keeps us all happy for a while but can’t go on forever.

Caution should still be our watchword. Cash in the bank our goal. The patient is still a long way from going home.