Feast and famine for UK businesses
The Business Secretary, Vince Cable, today called for some fresh thinking on how to boost cashflow to Britain businessses, with the emphasis on getting the banks to do their bit. Robert Peston has written extensively on this in the past; I leave it to him to comment on the thrust of the government's approach.
But I am struck, once again, by the disconnect between the macro and micro picture on UK corporate cashflow. We hear a lot about the lack of money flowing to British businesses - the impossibility of getting a loan, and how the government might strong-arm the banks to cough up more loans. All of that is true and important to discuss. But it would be easy to miss, in all this debate, that UK plc is actually in rude financial health.
Come again? Yes that's right. British businesses are loaded. In fact, in the first three months of this year, they ran a financial surplus worth more than 5% of GDP.
As the authors of the latest ITEM Club forecast point out, British companies - non-financial ones - were running healthy surpluses before the crisis and these have actually risen in the past 18 months. The share of corporate profits in GDP is down a little from its peak of 24% at the end of 2008, but at nearly 22% it is still roughly in line with the average for the past 10 years. In past recessions, the story was very different.
As I've commented in the past, the relative strength of company balance sheets before and during this downturn is a key part of the explanation for why the number of corporate insolvencies has been so much lower than you would have expected for a recession this severe - and part of why employment has also fallen by less than feared.
So, you might say that Mr Cable - and everyone else who talks about this - are worrying over nothing; British companies already have a lot of the cash they need to fuel the recovery. But of course, it is not remotely that simple.
First, the fact that many big companies are sitting on mountains of cash doesn't make much difference to all those SMEs who are struggling to get a loan. One of the probable benefits of the Bank of England's quantitative easing programme, especially in 2009, was to make it cheaper for big companies to raise money from the capital and equity markets. Where this was available to them, they often used the opportunity to pay down bank debt. So part of the decline in bank lending last year was indeed due to falling demand, as the banks always argue, not just a decline in supply.
But as the joint Business Department/Treasury paper points out, only 2% of SMEs currently use external equity as a source of finance. A third don't use formal sources of outside financing at all. For the rest, it's bank debt they mainly rely on. And, as we know, banks have often not fallen over themselves to use their excess cash to take a chance on SMEs. Either the loans are not available or, more often, they are there but on much less attractive terms.
So this is indeed an area where creative thinking might be called for, not just on the hardy perennial of getting banks to lend, but also how to encourage smaller firms to make use of other sources of capital.
True, the very smallest businesses are not going to be launching IPOs any time soon. But, as Adam Posen pointed out in one of his first speeches after joining the MPC, other countries manage to provide more diverse sources of funding to their mid-sized companies. It has been a big weakness for the UK in this recession that our corporate sector is so unusually dependent on banks.
This debate will run on. The big point we should never lose sight of is that big corporate financial surplus I mentioned at the start: it is little exaggeration to say that what happens to that money, and the money sitting on bank balance sheets, will in large part determine not just this government's future but that of the entire UK economy.
If you include the financial sector, UK companies ran a surplus last year of close to 8% of GDP. Put it another way: British businesses, taken together, saved enough last year to finance nearly 75% of the UK government's budget deficit. So, as a nation, we were able to come up with the funds to cover all but about 18% of that record deficit. We weren't quite as dependent on foreigners to come up with the cash as we often seem to think.
That sounds like good news. But that high level of corporate savings is also one of the big reasons why the pessimists about the UK recovery are so pessimistic.
Why? Because what that surplus tells you is that companies (inside and outside of the City) aren't confident enough in the future to invest their revenues. Even with a very low cost of capital by historical standards, they think it makes better financial sense to hold on to that cash, or use it to run down debt.
If firms continue to save this much, and consumers either save more or at least chose not to run up a lot more debt, then the government - as a matter of arithmetic - will continue to have a mammoth deficit, whether it has planned for one or not. You might see the structural - controllable piece - of the deficit go down, but slower growth would push the cyclical part of borrowing up.
This is at the crux of the debate between those who support George Osborne's approach - and those who want to cut the deficit at a slower pace. In effect, it all comes down to whether there will be enough private sector spending - ideally, investment spending by domestic firms, and spending on British exports by foreign consumers - to lower corporate saving and also bring down the current account deficit, which you can think of as imported foreign savings.
That's why Mr Cable and Mr Osborne need, and want, to do all they can to get cash in the hands of every British company with a good business plan. That is why they need to make sure that raising bank capital and liquidity requirements over the next few years doesn't cause another sudden crunch in corporate bank lending. And that is why we all have a massive stake in their success.