Inflation down, interest rates stay; business hopes grow

Mark Carney, Governor of the Bank of England, brought some sunshine into lives across the United Kingdom with news of the economy’s growth, lower inflation and declining unemployment.

Downsides to this news — and we have to consider them — is that growth, lower inflation and rising employment should herald a change to the very low interest rates that have helped to mitigate against inflationary pressures that we’ve had over the last few years.

The question I’m interested in is — on behalf of all businesses here in Hertfordshire — when will the Bank of England raise the interest rate? The Governor was clear that the Bank will consider a rise when unemployment falls to 7 per cent. When’s that likely to be? There is some speculation that this will be mid 2015, but perhaps a more realistic expectation will be end 2016.

There is so much riding on rising interest rates, available cash for investment, current productivity levels and household cash for spending in the economy.

What will this mean for local businesses? In a Bank of England briefing to East of England businesses a few days ago, its East of England agent, Phil Eckersley, pointed out that the lending to SMEs was contracting at a faster rate than previously; a concern for the Bank. For smaller businesses however, there has been slightly cheaper financing; credit costs have improved for them.

Business investment and intentions are showing signs of improving. Our export prospects look quite good, despite a recent dip. But we’re still not exporting our way out. What could damage our export prospects is the strengthening of the Stirling on world money markets.

New employment growth is easing back; businesses are beginning to mop up capacity to improve productivity. Companies are expecting output to increase and demand for employment to outstrip jobs. Hopefully this will be a short-lived trend, particularly here in Hertfordshire.

Wages have seen no real change. Private sector earnings are subdued; bonuses are lower too. Prices are likely to rise, but this won’t affect wages.

We are consuming more than we’re earning. This means we’re saving less, which itself means we are feeling much more confident about the future. One indicator of this is the strengthening new car market; we’re rewarding ourselves now.

For household borrowings, which affect money flow into the local economy, there have been some cheap deals on personal loan rates. Housing affordability is a key factor, and while there has been rumour of a housing market bubble in response to Help to Buy initiatives, it is thought that this is highly unlikely; although hotspot overheating might occur in one or two places, such as London.

Britain might be an island, but we’re not immune to less positive recovery headwinds from other continents. Here in Hertfordshire, we must actively encourage micro business ambition, help SMEs where we can pursue finance options such as capital grants and to recruit from the local labour pool, and constantly find ways to create jobs for school leavers.

Getting the message across...

My colleague David Frost at the British Chambers of Commerce has certainly stirred up a hornets nest with his description of the outcome of BCCs most recent quarterly survey. Frightening, awful were just a couple of the adjectives he used. Personally I am concerned about the seemingly endless queue of people lining up to tell us how bad things are but, nonetheless, can understand where he is coming from. Things are certainly not as we would wish them to be.

I would prefer it if we all drew breath and allowed time for some of the measures that have been put in place to work. The reality of course is that until the banks start doing business very little is likely to change but, at least, the announcement by Lord Mandelson that there will be further funding to support lending should help. Following fast on David’s words I am sure he will claim that the BCC were instrumental in speeding up this process and, in fairness, so would I. Indeed it is correct to say that the British Chambers have led the debate throughout and I wouldn’t mind a small wager that they will be the first to call the recovery too.

Balancing the requirements to encourage government action and the need to protect business interests is not always an easy trick but the BCC has generally trod the line with a high level of expertise.

Looking forward it seems to me that one of the key messages arising from the problems in the economy is to learn the lessons. The current economic conditions not only cause difficulties but also identify, and amplify, some of our existing shortcomings.

As we fall down the OECD skills tables one cannot help thinking that if we are to continue attracting high levels of inward investment we will have to raise the level, and relevance, of the skills we seek to give our workforce. Despite announcements of redundancies there are still vacancies but sadly many require skills that we are short of, skills to support the engineering, electronics and pharmaceutical industries to name but a few.

If we are looking for some good news it is that we have many innovative and creative businesses with growth potential, we simply need to find more effective means of supporting them.