11th August 2010
Few days have passed since mid-2007 without some discussion of the credit crunch and the phrase has passed into the lexicon as a byword for financial disaster.
Three years on, bank lending and economic growth are still yet to recover fully and Monday's Guardian website included a poll on whether the end of the crunch is in sight. It offered the options of recovery within 18 months or no return to pre-2007 levels for at least a generation.
The truth, as ever, seems to lie somewhere in the middle. Simon Ward, chief economist at Henderson, said in the UK, we have now had three successive quarters of economic growth so are out of recession from a technical standpoint. "Q2 figures were also higher than the same period last year, which is a clear sign of improvement," he added. "I am sceptical on any kind of double dip and my recession probability indicator – using various monetary and financial inputs – only shows a small chance of another prolonged downturn."
On the question of the lack of bank lending, Ward believes the real weakness is on the demand side rather than supply, with few companies keen to take on debt: "Some smaller firms are still struggling to access credit but they make up a quarter of total bank lending in the UK so only around 10% of companies are facing borrowing constraints," he added. "This is backed up by recent business surveys, with CBI polls of larger manufacturers and SMEs revealing credit is no harder to access now than historically."
Elsewhere, Schroders chief economist Keith Wade is also in the ‘no double dip' camp, feeling the necessary major adjustments in the world economy are behind us. "Companies have largely restructured operationally and in terms of balance sheets, while consumers have also retrenched," he added. "Double dips are rare and while we cannot rule out a shock in oil prices for example, our central case is for ongoing weak recovery."
However, he believes that there is still a crunch on credit – holding back demand for new borrowing as well as supply: "Access to credit has improved – with larger firms also able to raise money through bond issuance – but the problem is how much the banking sector has shrunk," he added. "Several overseas banks that were operating in the UK have withdrawn and while these companies are lending, there is still not enough liquidity overall."
He highlights ongoing regulatory uncertainty in the banking sector as another offshoot of the credit crunch and believes when this is resolved lending may improve. "Authorities are currently keeping a balance between regulating the banks and not wanting to endanger lending in the near term," he added. "This has meant regulatory changes like Basel III have been pushed out and their passing should effectively close the credit crunch era."
Gartmore's head of multi-manager Tony Lanning said the credit crisis has morphed into the current sovereign debt problems but feels governments have again taken measures to reduce contagion risk. "We do not see a double dip as the likely outcome," he added. "Growth will be anaemic but against the headwind of uncertain macroeconomics, many companies are in great shape.
"The credit crunch hit corporates harder than the consumer and while there are headwinds, owning risk assets over time will be rewarding."
HSBC Global Asset Management is also predicting anaemic growth, offset by the large-scale restructuring at corporate level. Simona Paravani, global CIO, wealth, at the firm said the Government's proposed cuts and fiscal strategies may put pressure on growth and the UK consumer still has an excessive amount of borrowing. "But UK equity market valuations remain historically cheap, at around 10.5x earnings compared to around 15x on a historic basis, and this is a pretty healthy backdrop," she added.
Overall then, consensus suggests an ongoing slow recovery, with little chance of double dip barring some kind of external shock. While the credit crunch is still with us, liquidity and the shape of bank lending is much healthier and many feel imminent bank regulation can legitimately be seen as the final act of this particular financial tragedy.