Bill Jamieson: Despite some positive company reports, confidence is still at a low

Published on Wednesday 28 July 2010 15:59

IN recent weeks a strange sense has intensified that we are living in two parallel worlds. There is the world of business, where the current results reporting season has brought a significant number of buoyant and upbeat trading news - at least for the first half of the year.

And then there is the world of official data, economic news and commentary. Here the tone is not so upbeat at all. Indeed, there are growing signs from this world that we are experiencing a marked slowdown in the pace of recovery.

Which world is "right", or gives a more accurate pointer to what lies ahead? Is the "good news" being crowded out by a relentless obsession with the problems of the public sector and the looming cutbacks in government spending? Are we creating a climate of fear where businesses shrink back from investment?

Looking at a range of company announcements over the past week there is little doubt that a recovery of sorts is underway.

Companies as disparate as Rentokil, AG Barr, Centrica and Rank have posted improving results. Fund management companies with significant presence in Scotland, including St James's Place, the stockbroker Brewin Dolphin and Rathbones, turned in buoyant revenues and profits.

Meanwhile news of substantial orders have come from GKN and BAE Systems. Of course, there are plenty of companies still struggling, but there has been a distinct and discernible pattern of upturn. And that is news that is important for business to hear, because it helps to bolster business confidence and that can be critical in creating a positive environment in which business and investment decisions are more likely to be made.

But which is the "real" news? The corporate earnings uplifts? Or the macro data doom and gloom? The paradox is partly explained by the different time periods involved. "Macro" data flow for the large part is reflecting business and financial conditions in the more recent period.

Company earnings statements are typically for the year to end-March or interim results for the half year to June. The concerns are growing over the most recent developments in economic information.

Company earnings are also reflecting a recovery from historically very low levels that prevailed a year ago, when the economy was experiencing its sharpest slowdown since the second world war.

But such is the shadow being cast by the cuts in the public sector, there is a real risk that the very recovery that bringing down the budget deficit was supposed to encourage may be snuffed out by the immediate problems facing the public sector.

Last week the European Commission's consumer confidence index for the UK showed a fall for the fifth month in succession, and is now at a 13-month low. Particularly sharp falls were recorded in UK consumer views on the economic outlook for the next twelve months while concern over unemployment rose sharply.

Economist Howard Archer at Global Insight hits it on the nail: "This indicates that already fragile and deteriorating consumer confidence has taken a serious knock from the extra fiscal tightening measures. There is also clearly heightened concern that the fiscal tightening measures could derail an already muted overall economic recovery."

Real retrenchment can also be seen in the latest lending figures from the Bank of England. These showed mortgage approvals down for the second month running in July, with a 4.4 per cent fall over June.

Approvals are now back to the deep recession levels of May of last year. Total net lending to individuals is also down. Of more serious and immediate concern to business confidence - particularly in the small firm sector - are the continuing problems with bank lending and in obtaining finance at interest rates that bear some relation to the ultra low official rate and without incurring penal fees and charges.

Late last week the Forum of Private Business expressed concern over figures from the British Bankers' Association (BBA) showing that lending to the UK's small firms is in decline.

They showed that new loans to small firms rose by 75 million between May and June 2010, but year-on-year term lending has fallen by 269m compared with a year ago when the economy was still in recession. Average monthly loans have declined by almost half since 2008, when banks lent an average of 991m to small firms. In 2010, the average monthly loan rate is 564m.

The Forum's own Economy Watch survey shows that loan facilities for the 358 members on the member panel declined by 66,000 during the past month, while overdrafts decreased by 34,500 - and this, as Matthew Goodman, head of policy at the Forum of Private Business, points out, just when small businesses need more finance in order to expand.