Plus Finance commentary on the current economic situation – November 2018

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Benjamin Franklin is attributed as saying, “In this world nothing can be said to be certain except death and taxes”. I would disagree and say there are three certainties – death, taxes, and recessions.

We last went into recession ten years ago, which was one of the worst on record, and it took us an age to recover. Indeed, it could be argued that we have not fully recovered, but there is one sure thing and that is another recession is coming. The question is when?

The economic definition of recession generally involves a fall in GDP in two successive quarters. Since I entered the world of commerce in 1987 I have experienced three recessions. Each has been unique.

The informed thinking is to expect a recession every seven to ten years because that’s the business cycle. As the last one was in 2008/09 we’re now probably overdue, but these are particularly unusual times and we’ve never had an interest rate climate such as this.

Lloyds Bank has recently published a short paper looking at the causes of recessions and suggests that the next one might be closer than we think. It points out that interest rate rises were a key factor in three of the last four recessions and, as they are at a historic low at the moment, they can only go up. It’s a valid argument but I think that central banks have this risk covered and I do not foresee a sudden upward surge in interest rates. Inflation has also had a major part to play in past recessions.

In trading businesses, there is good money to be made from successfully anticipating an impending recession. You unload stock and do not start buying again until the recovery is assured, but that is not a game we can play in asset finance as we are locked into term contracts. We need to support our customers through difficult times to prosper with them when conditions are buoyant again.

For the time being the asset finance industry remains optimistic and lending is currently at an all time high. Low interest rates and willingness to lend by the leasing companies have a lot to do with this, but SME confidence is still relatively strong despite the Brexit headwind blowing in our faces. In his recent budget, the Chancellor Philip Hammond has recognised the importance of maintaining investment levels, and has increased the Annual Investment Allowance to £1m for the calendar years 2019 and 2020.

The Annual Investment Allowance (AIA) is the amount of capital equipment a business can buy (soon to be £1,000,000) and be able to claim all related tax benefits in the year the assets were purchased. It should be said that this is not a new tax give-away, it simply accelerates a tax benefit that would normally be available over the period of time the asset is used in the business. It also only applies to qualifying assets, so elements of an office fit-out for example would not be allowable. Speak to one of our experts about the optimal ways to fund a project – often a mix and match solution of hire purchase and lease rental can provide the best solution.

In conclusion, and for what it’s worth, my advice would be to prepare for a downturn in the economy by keeping a close eye on overheads but also to keep a look out for opportunities. Borrowing costs remain at their lowest in history, so take advantage of this when considering any expenditure by borrowing on a fixed term basis and retain cash in the business. Always remember, cash is king, and my belief is this will become particularly relevant over the next couple of years.

Steve Pullen/Director