Tag: capital
Does the UK’s low inflation present an opportunity for UK SMEs?
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Despite UK interest rates plumbing historic lows, inflation fell negative this April for the first time since 1960. This is plainly an unusual occurrence, particularly in the face of such expansionary monetary policy, and has led some public figures to fret that it could be a “canary in the mine” of the UK recovery; a symptom of some underlying economic malaise. In truth though this gloomy outlook seems largely unwarranted, and Mark Carney has forecast that this deflationary blip will be forgotten by the end of year when inflation, he believes, will sit above 1%. Indeed, he has already been partially vindicated by news that inflation is now positive again – albeit at just 0.1%.
The Bank of England forecast should sooth fears of a Japanese-style deflationary spiral then. But this near-deflationary environment will likely remain a reality for the next few months. So will this period pose opportunities or threats to SMEs? Unsurprisingly, the answer is not entirely clear-cut.
A low inflation environment certainly can bring many benefits to businesses, such as allowing them to capitalise on static costs to make large purchases at favourable prices. In fact, a recent poll published in Economia found that just under one third of SMEs plan to increase capital investment in the next 12 months, so it seems many small business directors have already acknowledged this. Most businesses will also benefit from energy costs remaining constrained, whilst those in the manufacturing sector specifically will profit from steady input costs. On the consumer side, the brief drop into deflation may act as a shot in the arm for business, with people’s increased purchasing power stimulating spending. And speaking more generally, the next few months will provide SMEs with a chance to reflect and streamline their expenditure in preparation for the point when inflation appears again and margins are squeezed.
So far, so good then. But at only 0.1% inflation a brief slip back into deflation remains a possibility, and this could be problematic. Most worryingly, a second dip could pique the thrifty instincts of consumers, causing individuals and businesses to postpone purchases in anticipation of lower prices rather than cashing in on good prices now. Whilst current forecasts make this seem unlikely, the message for SMEs is clear: take advantage whilst you can.
Quantitative Easing – Too Blunt an Instrument?
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Maybe I’m not the only person who grew up in the 70s who finds a great irony in governments now trying to stimulate inflation. Just as they had little idea how to control inflation I doubt that Quantitative Easing (QE) is the best way to stimulate it. A more targeted approach is required, an approach that will do more than increase asset prices, an approach that might get industry and economies growing and growing faster.
Yesterday the European Central Bank (ECB) announced a larger than expected two year program of QE in the expectation that this will avoid continued deflation in the Eurozone. While QE is likely to be successful in this limited aim, it is possible that despite QE the UK will suffer a period of deflation, the lessons from the UK and the US suggest it will do little else.
QE in the UK and the USA, and arguably already in the Eurozone, has increased asset prices. Maybe it has even created an asset price bubble, if it has then as night follows day, bust will follow bubble. What QE has failed to do in any meaningful way is to:
- get capital into businesses, particularly smaller and medium sized businesses – the engines of all economies,
- increase the buying power of consumers, there is some evidence that wages are growing again now, but generally wages have not increased these last several years,
- increase productivity, which by some measures has fallen, this may be linked to 1 above, and is the largest single problem facing the UK economy today.
There are many restrictions on government, national and / or EU, passing money direct to companies and direct to their citizens. However as part of the program to avoid deflation greater emphasis should be given to this. If commercial banks won’t lend to any but government and the largest corporations, and the evidence of the last few years is that they won’t or have forgotten how to, then government sponsored development banks, programs for state aid and AltFi businesses should be given more of this money to do so and stimulate industry. Giving more money to consumers is relatively easy, reduce personal taxes. In consumer lead economies its nonsense to take money away from those who drive effective demand.
Of course there’ll be cries that this approach is unfair; the Germans may well be better at state aid than the Greeks for example. And taxes are for national government not EU, so there will be a disparate approach. There’s also a question of how to make sure there’s value for money from the investments made. Then again there’s little value from QE, beyond possibly a small amount of inflation.