Waiting for the ‘Receiver Special’

Bill Jamieson says patterns of bank lending and business investment indicate that considerably worse news is still to come in the current economic downturn

After the worst of the 1980-81 recession was over, I came across a phenomenon which gave an unsettling insight into the nature of the business cycle. I remember making early-morning rail journeys out of London to South Wales and the north-east of England. The carriages became unusually full of accountancy types in shirtsleeves toiling over notebooks, spread sheets and calculators.

After one particularly crowded Monday-morning train journey to Cardiff I remarked to a prominent business figure there that this surely was an encouraging pointer to a business upturn. ‘Oh no,’ he corrected me. ‘You came down on the Receiver Special.’

I was right about the accountancy types dispatched from London head office, but innocent of their baleful purpose. It was a memorable introduction to a grim truth of the business cycle. The peak period for business failures is neither in the initial downswing, nor in the trough, but a year or so into the recovery, when firms need to tool up and replenish working capital as business picks up. At this point of the ‘hockey stick’ upturn, cash is keenly needed, but most difficult to obtain from a chastened banking system reluctant to lend against a background of mounting bad-debt provisions – and particularly reluctant to lend to companies whose previous year’s accounts were deeply bathed in red.

Six weeks ago the wisdom eagerly grasped was that we were past the worst of the credit crisis in the financial sector. Are we? For UK banks with share prices buckling under the weight of massive rights-issue calls and worrisome property lending exposures, that judgment has come to look premature. And for an apprehensive business sector there is a sense of foreboding that the worst is most definitely still to come.

A trickle of early failures is starting to flow: small retailers whose survival till now rather than failure has been the surprise; estate agencies and businesses particularly dependent on growth to survive. But for the UK corporate sector as a whole, default rates remain, for now, at near-record low levels.

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