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Lease Team

Ready for a recession?

21/09/2018

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Allan Foad writes: Benjamin Franklin is attributed as saying, “In this world nothing can be said to be certain except death and taxes”. I would disagree with old Ben and say there are three certainties – death, taxes, and recessions.

We last went into recession ten years ago, which was one of the worst on record, and it took us an age to recover. Indeed, it could be argued that we have not fully recovered, but there is one sure thing and that is another recession is coming. The question is when?

The economic definition of recession generally involves a fall in GDP in two successive quarters. Since I entered the world of commerce in 1970 I have experienced four recessions. Each has been unique.

In my regular lectures on credit assessment between 1995 and 2005, I used to tell my audience to expect a recession every seven to ten years because that was the business cycle. The next recession in the UK did not occur until 2008, but I was nearly correct, because the West dodged a bullet in the late-nineties when Asian economies stumbled.

I have often anticipated a downturn, but I have never really foreseen a recession coming. Few people have. I take comfort from the words of the American economist Paul Samuelson who wrote, “Commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions!”

Lloyds Bank has recently published a short paper looking at the causes of recessions and suggests that the next one might be closer than we think. It points out that interest rate rises were a key factor in three of the last four recessions and, as they are at a historic low at the moment, they can only go up. It’s a valid argument but I think that central banks have this risk covered and I do not foresee a sudden upward surge in interest rates. Inflation has also had a major part to play in past recessions.

As I write, the trade war initiated by Donald Trump represents a real threat. Whilst this is essentially aimed at China, it impacts on all first world economies. If this war escalates it could well cause the next recession. I do think it is time to start planning for the next one.

In trading businesses there is good money to be made from successfully anticipating an impending recession. You unload stock and do not start buying again until the recovery is assured, but that is not a game we can play in asset finance as we are locked into term contracts. We need to support our customers through difficult times to prosper with them when conditions are buoyant again. What we can do is try to focus on customers who are likely to be able to withstand a downturn and assets that can be considered recession-proof.


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