Friday, 3 July 2009

Spot the trend

What is the first thing you notice about this chart. Looks rather flat doestn't it. Even in the first quarter of 2009, things haven't changed much.

This chart tracks UK gross profitability in the private non financial corporate sector. Despite the recession, UK profitability is holding up quite well. Yet the UK banks have basically abandoned lending to UK firms. Profitabilty, or the lack of it, doesn't explain why.

This chart tells us that the business case for corporate lending is unchanged, so why don't the banks want to lend? It has to be that banks see something nasty in the future. They expect future profitability to decline.

Why would they think that? Because UK monetary and fiscal policy is chaotic. The current mess will end badly, the private sector will suffer and therefore it is better to avoid lending.

There is a simpler way to save the UK economy. It is radical idea. The government should run its finances responsibly and the Bank of England should stop trying to inflate our way out of a recession. It will work. Furthermore, the UK economy won't recover until we sort out the policy mess.


Mitch said...

Never happen! those numptys in the HOC and No10 have to have some cash to spend or at the least some green shoots, even if they are genetically engineered and on life support.
None of the fools take a view longer than 5yrs.

Anonymous said...

You are a chart master Alice!

The chart does look rather flat but if you look from 2008 Q1 onwards, profits look as though they are going down and it is reasonable enough to expect that they will.

Anonymous said...
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Anonymous said...

Surely we have established that the banks lending policy was irrational as a business strategy these last few years. Why would you assume that rationality has returned now, and that therefor:-

"It has to be that banks see something nasty in the future." ?

They aren't lending because they are incompetent. Always have been.

Although perhaps they are waiting til they can extract a bonus for themselves once the cosh of state ownership has been removed.

Nah, Its because they are idiots.

Anonymous said...

Alice, if interest rates move to anything like market rates after QE ceases, or slowly recedes, they will move to at least 7%, and possibly as high as 12% to contain the resultant inflation.

This will cost anywhere from £90b to £130b in interest charges alone, pa.

Do you seriously think the UK shrinking GDP economy can carry that cost??

Look out below.

Stock markets could rise to incredible levels, but they will be in a worthless currency.

Equities did well in the 1920s in germany. they were a good hedge against hyper inflation.

Jo Jordan said...

Do we have any access to bank accounts? My guess is that they are back to lending to each other but without figures . . .

Anonymous said...

The UK is a terrible place to launch a business full stop. In London for example, you face over-priced commercial and residential real estate, next to no visible support from any government agency, high taxes, meddling red tape telling you who you should hire, and an overall atmosphere of negativity and hostility that is frankly not inspiring.

boiling frog said...

If we get a deflationary spiral this will drill large holes in banks balance sheets. Therefore I think this is what the banks are anticipating (lower corporate profits, more asset deflation against which collateral they have already loaned).
The Bank of England will go on trying to inflate, sterling may well drop to parity with euro and or dollar, and eventually they could be successful in their aim. Then they need to put the genie back in the bottle and put the lid on it.
oh, dear I'm getting too pessimistic again, someone give me a green shoot.