K2 blog for advice on business finance and survival

Given the dire warnings about prices depending on the outcome of Brexit, consumers’ confidence is looking unlikely to improve any time soon. This is not helped by the week’s announcement by Tesco of a possible cut of 9,000 jobs and worries in parts of the country about the future of employment such as in the automotive industry and for SMEs within its supply chain.

For SMEs, especially those dependent on consumer spending, the likelihood is that they will have to not only scrupulously manage their cash flow and planning but also ensure their invoices are paid on time. They may also be well advised to strengthen their marketing initiatives and those “extra services” that serve small, independent businesses so well by retaining loyal customers.

The official definition of a recession in Investopedia is “a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).”

The IMF predicted global growth of 3.5% in 2019. In October, it forecast 3.7% and for the UK, growth of about 1.5% this year and next, but it also says there is substantial uncertainty around the figures, given uncertainty over the Brexit outcome and ongoing trade wars particularly between China and the USA. Are there pointers towards recession in the UK?

Employment, another critical recession indicator, is also at an all-time high. But with businesses already announcing job cuts or moves to Europe ii there is no Brexit deal, and an estimated 70,000 retail jobs lost in the past year it will be interesting to see how the employment figures hold up over the coming year. How will a switch to sustainability impact on traditional measures for recession?

According to a survey carried out by PwC “Pessimism among chief executives has risen sharply in the past 12 months as the leaders of the world’s biggest companies have taken fright”, a sixfold increase since January 2018. Their concerns have been largely attributed to increasing protectionism, or nationalism as some would have it, notably in Turkey, Poland, Italy and the USA and to the deteriorating relationship between the USA and China as a result of the ongoing trade war instigated by Trump.

There are any number of leaders who have published details of their daily schedule, which invariably includes everything from getting up before dawn, fitting in some exercise or yoga, a healthy, energising breakfast drink, to detailing precisely the time it should take for every activity in the diary for that working day as well as extra-curricular time spent on worthy activities “giving something back”.

You should also have a clear idea, if you regularly check the metrics, (results of activity) where your efforts have gained the most traction, whether this is visits to your website and how long visitors stay there, or whether it is the interaction you have gained on social media platforms, or the viewings and engagement of email marketing.

However, at December’s UN Climate Change summit in Katowice, Poland, the message seems to have struck home with some of the world’s largest investors, including pension funds, insurers and asset managers, who issued a Global Investment Statement warning that without urgent action there could be a financial crisis several times worse than the one in 2008. They demanded urgent cuts in carbon emissions and the phasing out of all coal burning.

All this may seem a long way from the day to day concerns of SMEs and larger businesses, especially amid the current worries of Brexit, the latest ONS (Office for National Statistics) figures for UK economic growth was near-stagnant in the last six months of the year and amid warnings from the World Bank that the Global Economy, too, was facing significant problems in 2019.

This theme was picked up in an article by the economist Ken Rogoff in the Guardian where he outlined the main risks which included a significant slowdown in China, “a rise in global long-term real interest rates and a crescendo of populist economic policies that undermine the credibility of central bank independence, resulting in higher interest rates on “safe” advanced-country government bonds.

While this tends to be attributed to uncertainty about the future of diesel-powered vehicles or rising raw materials costs given the low value of £Sterling, is it also possible that people are beginning to think harder about their need for and use of cars in the context of climate change? Equally, are people beginning to question the wisdom of constantly updating their wardrobes and their pursuit of the latest new “thing”?

In recent weeks there have been several interesting and thought-provoking articles in Wired, an online publication focusing on all things technological. They include one in November on Carbon Capture technology, which was greeted enthusiastically ten years ago, but whose development has struggled for funding since because although feasible, developing the technology for it to be useful at scale is difficult and it is hard for governments to justify the upfront costs.

Perhaps the most interesting article of all was by Bernice Lee on the theme of “small is beautiful”, an idea first proposed in 1973, by EF Schumacher. It was largely ignored by big businesses wedded to economies of scale as defined by Adam Smith, in a model that argued that scale and the division of labour lowers costs and increases efficiency.

Over time, however, the Fintech definition has been expanded to include any technological innovation in — and automation of — the financial sector, including advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management, asset management and some would now also include crypto currencies such as Bitcoin and their administration.

Fintech is also sometimes described as disruptive technology, in that many Fintech start-ups are designed to provide financial services in non-traditional ways, such as by offering online shoppers to secure immediate, short-term loans for purchases, bypassing their credit cards or by offering online and App-only services that bypass traditional lenders.

While traditional lenders and finance providers have tried to adopt some of the Fintech innovations, they begin with burdensome overheads and cannot generally compete unless they embrace the need to fundamentally change their existing thinking, processes, decision-making, and overall corporate structure. This is not something most managers can cope with.

These included future freedom of movement of labour and the absence of sufficient numbers of skilled tech workers available in the UK, the loss of the ease of the passporting of services to other EU markets and consequently the decision Fintech companies may face of whether to relocate to other countries in Europe, at least in the short term. Among the cities expected to be most likely to benefit from welcoming such moves are Dublin, Paris and Berlin.

Finally, regardless of Brexit, if Fintech is to thrive, after a year of seemingly frequent banking technology meltdowns, not to mention hacking scandals, there needs to be much more robust and secure protection against fraud and data protection. To achieve this we at K2 have invested in Tricerion as the future of login security. Check it out at www.tricerion.com.

The New Year is in any case a time when it is traditional for SMEs to refresh their business and marketing plans and while the uncertainty over the future has to be acknowledged, especially for those SMEs involved in Europe-wide, just in time supply chains, I would argue that this is a perfect time to accentuate the positive and focus on innovative thinking in SME forward planning. I would also argue that the world won’t collapse whatever the outcome and while most SMEs will be affected by Brexit, there will still be business to do. Accentuate the positive in SME forward planning

So, for example, if business growth is part of your business plan and you know you may need more staff, perhaps rather than put off plans because you are uncertain about whether suitable people will be available when you need them, think about whether you can introduce systems such as automation or AI to work smarter rather than relying on finding more people.

Economic recovery, particularly in the UK and USA, has, in any case been sluggish in the decade since the 2008 global economic meltdown, which prompted central banks to set interest at very low rates in an attempt to protect their countries’ economies by stimulating investment and business activity. A little history on exchange rates and currency values

The quantity of gold held by a country determined the value of its currency and under the gold standard trade between countries was settled using physical gold. So, nations with trade surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports.

The UK abandoned the gold standard in 1931 and the US in 1933, moving instead to the current fiat system, where currency values fluctuate dynamically against other currencies on the foreign-exchange markets. Fiat money is the currency that a government has declared to be legal tender, setting it as the standard for debt repayment. Essentially its value is based on market perception.

It has been argued that moving off an actual physical commodity like gold has made currency values and therefore exchange rates more vulnerable to manipulation by politicians and central banks, and therefore created a more volatile and vulnerable economic climate. This is where the market’s interpretation of politicians and central bankers is fundamental to currency values. The effect of exchange rates on business

A good recent example has been the benefits to some UK SMEs, particularly in the service and hospitality industries, which during the summer of 2018 experienced something of a boom in tourism from a combination of a long season of good weather and the decline in the value of £Sterling making it cheaper for foreign tourists to visit the UK.

On the other hand, even small local SMEs whose businesses depend on selling goods and services where parts, components, food ingredients or raw materials come from overseas saw their costs rising because £Sterling’s buying power had been reduced in comparison with currencies in other countries. Can SMEs protect their businesses from exchange rate fluctuations?

For those that have to source supplies from overseas, hedging against cost increases due to exchange rates can be done by negotiating a forward contract in your own currency based on a set price with the supplier or at least fixing the price with purchase of a forward exchange rate. This may mean missing out on future changes in the exchange rate that might benefit the SME buyer, but will provide some degree of certainty when planning ahead.

A snapshot of the current state of global confidence, the global ECM (Economic Confidence Model) from July this year suggests that the USA may be moving into a serious high in 2020 regarding liquid assets (non-fixed), while the rest of the world is heading in the opposite direction. The Dow Jones has been heading ever upwards, while the UK, European and Chinese markets seem to have peaked and are heading downwards. This also applies to currency values.

According to Richard Partington, a Guardian economics correspondent, the potential headwinds for 2019 include a plateau in global growth along with slower growth predicted for the US and China, plus both public and private debt around the world being at a record high. Added to these, he says, are the risks from Brexit and from the US Fed hiking interest rates.

Despite the 2008 crash, and the subsequent measures taken by Governments and Central Banks such as using quantitative easing and keeping interest rates low to stimulate economic activity and requiring banks hold more capital to avoid a repeat collapse, both Governments, and investors, still have faith in Government debt in the form of bonds and property on the basis that economies are stable and will continue to grow.

So, by this logic, policies such as those of US President Donald Trump’s “Make America Great Again”, that encourage investment to return to the US, and his threats of trade sanctions against those economies that are perceived as competition to the US economy are unlikely to help to stabilise the global economic situation and instead would build up the recessionary pressures in the rest of the world.

The UK Government, too, has been taking steps to deter foreign investment in property. Then there is the rise of various so-called “populist” movements across the world, such as in Italy, Turkey, Hungary and elsewhere, which again focus on national interest above all. Another danger, according to Partington, is victories for populist parties in the forthcoming EU parliamentary elections in May 2019. The mood would appear to be one of increasing restrictions on global trade.