How Britain’s borrowing is now hurting
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Associate Editor
David Stevenson May 01, 2009
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Having difficulty seeing those “green shoots” that so many people are talking about?
That’s not much of a surprise. They’re probably an illusion.
Why? Because Britain is hugely over-borrowed. And not just the government, whose horror stories we heard in last week’s Budget. Expecting the country’s economy to bounce back into growth mode, despite the dead weight of all the debt racked up by its inhabitants, just doesn’t make much sense. Indeed, the net effect is more likely to be the other way round – more and more Britons going bust.
Many companies are still trying to overcome the hangover of swapping equity for debt – which has to be paid for, come what may - during the boom times, while the personal debt mountain has just kept on growing. It’s now higher, at almost £1.5bn, than the entire amount the country produces each year.
The bottom line is that we literally can’t afford to borrow any more. No wonder, then, that despite all the recent chatter about banks upping their lending, and being a bit more willing to grant you that loan, it’s just not happening.
This morning’s Bank of England figures reveal a shocking slowdown in overall lending growth. “Lending to individuals” has only risen 2.2% over the 12 months, compared with a near-9% annualized increase a year ago and double-digit growth in 2007. Meanwhile ‘private non-financial corporations’ – that’s Bank-speak for businesses that make or sell things – only borrowed just over 3% more within the last year. That’s the smallest expansion for almost seven years and very nearly the weakest growth since Bank records began in 1998.
It looks like borrowing is topping out. And the next stage, of course, is when all the debts prove just too hot to handle.
Banks and credit card companies may seem to have plugged into the mood of the times, and are being a bit less aggressive in pursuing debtors these days. But still, almost 30,000 people in England and Wales went individually insolvent on a ‘seasonally adjusted’ basis – though I’m never quite sure how one can ‘seasonally adjust’ going bust - in 2009’s first quarter, 19% more than the same time last year.
Yet although that’s a record, it’s set to get even worse. KPMG reckons the numbers will rise progressively throughout the year, culminating in a highest-ever 150,000 Britons going into some form of personal bankruptcy in 2009.
And if this isn’t enough bad news, the pain is spreading. Almost 5,000 companies went bust in the first three months of this year, 7.1% more than 2008’s fourth quarter and a staggering 56% higher than the same period a year ago. To put that into context, it means that one in every 130 active companies went to the wall in the 12 months ended March 2009 compared with one in every 150 in the year to December 2008.
As more firms fail, a domino effect develops. Companies who’ve been dealing with businesses that go bust will almost certainly lose sales and also money that they’re owed, and may get into trouble themselves if the losses mount up. And that means more job cuts, which in turn hits the economy even harder.
“Today's statistics firmly squash the notion that there are any green shoots of recovery out there”, says Alan Tomlinson of insolvency practitioner Tomlinsons. “Since last autumn many of the companies we are seeing have suffered significant drops in turnover they’ve been unable to replace. I simply cannot foresee there being a slowdown in the rate of company insolvencies until the middle of next year”.
The knock-on effect of all this will be felt for many months to come. Less stuff will be bought – and sold – and fewer things will be made. As for recovery, there may be some “statistical noise”, i.e. the economy crumbles so badly that eventually some month-on-month comparisons look like there’s a bounce underway, but this will be short-lived. The country’s huge debt overhang means that it’s likely to take several years before we get back onto a sustainable growth path.
But as a postscript, what are the typical warning signs that your business might be failing and that you should seek advice?
Here’s what Tomlinson says:
- Inability to pay the monthly PAYE or quarterly VAT bills (or both)
- Having cheques returned by the bank/cash flow difficulties
- Recognising there are problems but saying to yourself: “I can trade out of it”
- Finding yourself under pressure from your creditors in the form of solicitors' letters, judgements, bailiffs or winding-up petitions
- Spending more time dealing with creditors and “fire-fighting” than actually working on developing and managing the business
- Not having up-to-date and accurate financial information
- Considering re-mortgaging your house or borrowing from relatives, friends or other business acquaintances to keep the business going
- Having sleepless nights or drinking excessively to forget about things
Sadly, many Brits can probably now identify with rather more of these than they’d like…
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