It is clear that the banking and financial problems which have dominated the media since last year continue to cloud the economy and the wider business climate. What seemed like a problem localised last September to the North West of England, and caused by an even more remote US practice of pouring tons of dollars into the rather unpleasantly named ‘sub-prime mortgages’, was in reality the tip of a massive iceberg of financial poor practice and greed. The crisis is truly global but Britain’s four million or more very small businesses and self-employed appear to be particularly vulnerable.
Quarterly surveys conducted by the Small Enterprise Research Team (SERTeam), the independent small business research charity that is based in the OU business school (OUBS), revealed in the third quarter 2007 that, while less than one in five small firms had formal term loans from their banks, more than half were exposed to more volatile forms of credit such as overdrafts (28 per cent), credit cards (17 per cent) and re-mortgages (13 per cent). At that time, the economy seemed quite buoyant and small firm owners were more concerned about regulations and red-tape than they were about the state of the economy. By the final quarter of 2007, however, 30 per cent reported that they had been directly affected by the credit crunch, 60 per cent reported indirect effects (from customers, suppliers, and so on) and a very large majority of 85 per cent expected an economic slowdown, including one third who predicted a full recession.
In fact, the current credit and property crisis has been building up almost unnoticed for some time. British Bankers Association (BBA) figures clearly show a sharp decrease in home purchases starting from December 2006. By March this year, home mortgage approvals were down to 35,417, less than half the December 2006 level and down more than 46 per cent on the previous March. The Council of Mortgage Lenders and the Federation of Master Builders confirm that, as mortgages become more expensive, house prices are on the way down. The Royal Institution of Chartered Surveyors (RICS) predicts a 40 per cent fall in house prices over the next five years. Indeed, this gloomy picture is confirmed by the Governor of the Bank of England, Mervyn King, who has warned that inflation is likely to remain two per cent over target for the next two years and that the booming ‘nice’ decade (no inflation, continuous expansion) is over.
This, of course, prompted comment that the ‘nasty’ decade is about to begin. With unemployment on the rise (the number of job seeker claimants has increased for the third month in a row), fears of a return to the ‘nasty’ early 1990s - the years of negative equity and business failures - are bound to grow. With private debt in Britain of some £1.4 trillion, British businesses and citizens are the most indebted in Europe (and, per capita, more in hock than the US). The UK accounts for one third of all EU credit card debt. Although an important source of business finance, particularly for the self-employed, this is very exposed to rises in interest rates and bank charges. Whether or not we are heading towards a repeat of the 1990s or worse, time will tell. What we do know now is that currently the sectors most at risk from the credit squeeze are the construction, financial and property-related/business services sectors (real estate agencies, surveyors, domestic repairs and so on).
Overwhelmingly self-employed or microfirms, they represent 44 per cent of all UK firms and some 28 per cent of all employment. The SERTeam Quarterly Surveys already show falling sales and employment in these sectors which will contribute to falling overall demand and spillover effects into other sectors. However, many of the smaller firms have shown in the past that they can be very resilient in recessions. They cut costs, reduce capacity and the larger ones do shed staff. The Quarterly Surveys conducted during the recession of the early 1990s revealed that owners tend to tighten their own belts first, cutting their own takings, and that they are reluctant to shed core staff (who, after all, may be family members). They keep their businesses ticking over, waiting for a change in fortunes when the recovery arrives, as eventually it must.