A panel of experts Insider brought together to discuss Yorkshire’s economic future was largely positive, says Peter Baber, although there were some causes for concern.
Alan Hall, regional director at manufacturing organisation EEF, with responsibility not just for Yorkshire but the whole of the North East, probably has more opportunity than most to assess just how much any downturn is biting into the regional economy. And a recent visit he made to a steel supplier in Scunthorpe, he said, convinced him, that, in some sectors at least, it’s more a question of “Downturn? What downturn?”
“This guy’s main plant just could not make enough steel,” he said. “And he couldn’t see any let up in that. The worst scenario he could envisage was a dip from 10 per cent to 7 per cent growth. Much of this of course is led by Chinese economy.”
Certainly the panel we assembled, of which Hall was a part, could think of plenty of reasons why Yorkshire business could be doing fine.
“Large corporates have been performing very strongly,” said Lee Collinson, corporate director at Barclays Commercial, “and we have seen a strong first quarter.”
As Malcolm Sawyer, professor of economics at Leeds University Business School pointed out, on a macroeconomic scale there appears initially to be little cause for worry at all.
“Employment is at its highest rate,” he said. “Nationally it is just over 29 million, although that might include people who might have two jobs.”
In any case, Hall pointed out that even if you are going to quibble about just what the true number of employed people is, that figure would include a sizeable chunk of people who have been attracted here from Eastern Europe. “And that shows how buoyant the economy is,” he said.
“Sure, if you dig deeper you find people – particularly those who are supplying the retail sector – who are starting to hurt. But we have a very diverse sector serving the aerospace, defence and automotive industries. People are talking about the world economy now, and China is still growing at 10 per cent and India at 8 per cent, so they are struggling to see where the weakness will come from for them.”
Nevertheless, others were a little less convinced that it will be all plain sailing, not least because the messages from China itself are not all good. Sawyer pointed out that inflation there has gone up considerably, while the Chinese stock market has lost 50 per cent of its value. “Admittedly the number of shares traded on that is very small,” he said. “But this used to be a country where anyone with a spare yuan would trade on it.”
Ian Williams, executive director for policy at the Leeds Chamber of Commerce, thought the general situation was “fragile”, although he could also see some “plus points”. “The value of the pound against the euro is having a benefit, but that takes time to come through,” he said. “But we are not in recession. Medium to long term confidence is still high.”
Many agreed that, among Yorkshire’s many different sectors, retail was finding it toughest at the moment. Duncan Mycock, managing partner of KPMG’s Leeds office, said such a case of good for some, not so good for others, was a symptom of the new economic era we are in.
“For the past 15 years we have not had the same cycles as we had for 15 years before that,” he says. “So we have come to expect there not to be boom and bust, but instead there is a twin track economy. That is the price we pay. Consumer businesses are doing poorly, but niche manufacturers are doing well.”
But even outside the troubled retail sector, others can see more clouds on the horizon. There have been rising factory prices, for example – “both in raw materials and utility costs”, said Williams. And Sawyer wondered if inflation was coming back – admittedly as a spectre, not the ogre that decimated the economy in the 1970s. “That might end up having a bigger effect than the credit crunch,” he said. “We have become used to inflation being low.”
Mycock said you only need to look at rising food and fuel prices to see there could be a worry.
There is also a worry that any sudden rise in consumers having problems with mortgages could have a knock on effect elsewhere. “Mortgage defaults have been at a historic low,” said Hall, “but I would be amazed if they don’t rise this year.”
Collinson said he had seen “no great increase in clients getting into difficulty”.
“But one US institution is forecasting over one million foreclosures this year,” said Sawyer, “although they are clearly in a much worse state than we seem to be.”
But there was widespread agreement with Yunus Seedat, corporate lawyer at Addleshaw Goddard, who said that it is impossible to say for sure what might happen in the next few months because we are in uncharted waters. “This downturn is coming from an unusual source,” he said, “so you can’t necessarily look back at history.”
Even something as dramatic as the Bank of England’s £50bn pledge to the banking industry was hard to figure out, he said. “It could free up liquidity, but it could also just back up banks who are in ropey conditions.”
He did think, however, that what the Bank of England is offering is generous. “The Federal Reserve may have made £200bn available, but if you think of the size of the economies, £50bn compares favourably,” he said.
Mycock was more pessimistic. You might not know exactly how the current banking crisis would pan out, he says, but you could be fairly certain that it will get worse.
"And that will certainly have an effect on business. The banks have a lot more pain to suffer yet, and that will affect confidence. There’s said to be a trillion pounds of provision to come out. It’s the supply of money rather than the businesses themselves. I don’t think, particularly in Yorkshire, that businesses are underperforming. But to believe that there is not more pain to come is to be very naïve. Just look, for example, at the base rate. It is going down, but the lending institutions are putting their base rates up. So there is obviously a correction to be had.”
So would an increasingly cash-strapped banking sector necessarily mean more companies going to the wall? Hall hoped not.
“I am optimistic because companies currently are not strapped for cash, whereas they might have been historically,” he said.
Not at the moment, of course, but when the time comes to repay debt, it could be a different story: many commentators said companies that have made use of the generous terms banks have been offering in recent years to leverage themselves up to the hilt will now be in trouble.
Seedat, however, wasn’t so sure. “You can still be a good business and be leveraged and pay debt,” he said.
His Addleshaw Goddard colleague David Handy agreed. “It’s really more about directors and their strategy, and if that is in line. If it is not, it’s those businesses that will get into difficulties.”
Mycock pointed out that being highly leveraged could in fact be a sign of a good business – the kind of business who, Handy agrees, had been able to “sell their story to the bank”.
In any case, said Collinson, banks’ attitudes to troubled businesses have now changed. Instead of opting straight away for insolvency, they go for restructuring. “We are better at spotting signs earlier now,” he said. “20 years ago we spotted them too late and insolvency was the only option. But as long as you refer early, there are things you can do to bring those businesses back to health.”
Overall then, Hall summed up the general feeling by saying the mood was “optimism tinged with a note of caution”.
Sawyer said: “The forecast this year is for 1.5 to 2 per cent growth. That compares with 2.5 per cent to 3 per cent the year before. So maybe we will have half a per cent higher unemployment. But these are not huge numbers. We won’t go into recession. We might get a bit close, but we will look back in ten years time and see this little blip.”
“I agree,” said Seedat. “Overall the experience will be flat.”