By Marcus Leach
While the 2008 recession was not as deep or prolonged as the infamous 1930s Great Depression, the UK's economy is in danger of taking far longer to recover this time round.
That is the warning from the Forum of Private Business’s Economic Adviser, Professor Phillip Wyman, as he looks to 2012 and what the new year has in store for small businesses.
Professor Whyman, a lecturer in Business and Economics at the University of Central Lancashire, is forecasting another stormy 12 months for small to medium sized enterprises (SMEs) as the UK, European and World economies struggle to cope with prolonged slow growth, the euro debt crisis, plummeting consumer confidence and spiralling unemployment.
“The current economic situation is serious,” said Prof Whyman. “GDP growth for 2011 is likely to come in below 1% once figures are in, and predictions for next year range from 1.2% to 0.5%, with the Office for Budgetary Responsibility (OBR) predicting 0.7% as its mid-point forecast.
“This is very weak indeed, and indicates that the economy is more fragile than most commentators realised.”
As a consequence Professor Whyman said he expects UK unemployment to reach 2.9 million, a figure he says is down to private sector expansion stalling in the face of global uncertainty — but less than the 3 million plus predicted by other economic commentators.
“Job losses in the public sector have not been compensated for by a rapid expansion in private sector employment, as predicted by the OBR a year or more ago, and it’s not surprising why this has not occurred,” he explained.
“Employers base investment and hiring decisions upon expectations for the future, and, with the current weak trading conditions, external factors such as the eurozone crisis, falling consumer expenditure and a continued reluctance for financial institutions to provide inexpensive loans for expansion purposes, these expectations are unlikely to improve in the near future unless something changes.
“What is becoming increasingly apparent is that, while the 2008 ‘credit crunch’ recession was not as deep as the ‘Great Depression’, the UK is in danger of suffering a far slower, more sluggish recovery. This could be potentially more damaging in the medium term.”
Commenting on the financial sector, Professor Whyman believes a tougher stance might be required from global institutions to avoid another credit crunch scenario. And he suggests that, while quantitative easing is a useful tool to stimulate growth, it could be used more effectively in the UK.
“Questions about the insolvency or bad debt exposure of individual institutions is damaging the sector, and has the potential to trigger another credit crunch,” he said. “Institutions should be forced to engage in more transparent book keeping by putting everything on the balance sheet, not hidden in offshore operations.
“I would like to see banks own up to residual bad debt exposure within their operations and, where necessary request recapitalisation, with shareholders taking a haircut to deal with issues of moral hazard.
“QE has provided banks with a lot of inexpensive liquidity, but if this is not being used effectively there is nothing to prevent government from extending credit easing, or, indeed, setting up an alternative system of development banks, such as occur in other nations, with an explicit agenda to stimulate economic development in the economy. If banks can’t or won’t lend to facilitate growth, then government should do so.”
However, Professor Whyman questions whether further QE from the Government would do much more for the economy. He believes it is time to consider a short-term boost through targeted fiscal policies designed to deliver ‘more bangs per buck’. Professor Whyman suggests Government might consider:
- Funding engagement with small and medium-sized businesses to pass on ideas about best practice
- Facilitating clustering business activities by providing supportive infrastructure and business advice
- Providing temporary support for key industries (i.e. social house provision, environmental energy)
- Tackling late settlement of accounts — typically by large companies delaying payment to smaller suppliers, and causing cash flow issues
- Labour market policy — improving skills training for the unemployed, better job matching for all sectors of the economy (including ensuring all jobs have to be advertised through job centres), provision of relocation loans to facilitate moving to find work, subsidised employment for a short period (with safeguards to ensure that this is not a deadweight cost, substituting for existing workers)
- Provision of more higher education places — this could be a temporary measure, designed to improve skills
- Funding of independent research studies examining innovative ways of delivering social benefits which may save money — for example whether free childcare would in fact make savings for the national budget, as has been recently reported, or not.
“Ultimately, economic activity depends upon demand. If aggregate demand is too low, Government needs to step in to make up the shortfall," he concluded.
“This is, however, a tricky balancing act. 2012 may well show just how good — or not — the Government is at it.”
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