smallbusiness.co.uk: Helping your business think big

Much like the faces of the soldiers on the landing boats heading for Omaha beach in the movie Saving Private Ryan, there is a grim acceptance among owner-managers that the foreseeable future is going to get bloody.

However, a recent speech by Mervyn King, governor of the Bank of England, did give cause for optimism (although you wouldn’t think so to read the press).

Sure, he mentioned the “R” word, but only a Pollyanna would be surprised to hear we’re in a recession. What he did say is that while we’re by no means out of the woods yet, ‘the plan to recapitalise our banking system, both here and abroad, will come to be seen as the moment in the banking crisis of the past year when we turned the corner’.

He says that the recapitalisation plan has already had a major impact on the restoration of market confidence in banks, notwithstanding wider concerns about the outlook for the UK and global economies: ‘In the UK, unemployment continues to rise and, over the past three months, has risen at the fastest rate for seventeen years, albeit from a relatively low level.’

Added to this, house prices declined by about five per cent in the third quarter and are 13 per cent lower than a year ago, so the recent weakness of the housing market is likely to continue.

The Consumer Price Inflation (CPI) index has risen from just above the 2 per cent target at the beginning of the year to 5.2 per cent in September. Internationally, there is obviously a slowdown too. Over the past year or so, inflation rose from 2 per cent to 5.6 per cent in the US and from 1.7 per cent to 4 per cent in the eurozone.

Says King: ‘It is probable that the drama of the banking crisis, which is unprecedented in the lifetime of almost all of us, will damage business and consumer confidence more generally.

‘But two pieces of good news should temper the gloom. First, the banking system will be recapitalised and, in due course, the banking system will resume more normal lending, although by normal I do not mean the conditions that prevailed prior to August 2007.

‘Second, oil prices have now fallen from a peak of $147 a barrel only three months ago to around $70 today. And wholesale gas prices have now also started to follow oil prices down. That will help to support the growth of real incomes as well as bringing down inflation.’

It goes without saying that it won’t be easy for British businesses, but the feeling is that the situation won’t be as apocalyptic as once feared. King says the Monetary Policy Committee must continue to set bank rates in order to meet the two per cent inflation target ‘not next month or the month after, but further ahead when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy…The slowdown in demand, and the recent falls in energy prices, will bring inflation back towards the target’.

Fingers crossed.

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