State of the Region: Cautious optimism for economic upturn

CAUTIOUS optimism is the prevailing sentiment for North West business leaders in their expectations for the economy in 2011, TheBusinessDesk.com’s State of the Region Survey has found.

According to the survey, sponsored by law firm DLA Piper, the majority, 55%, agree that the severe cuts to the public sector announced in last year’s emergency budget and taking effect this year, were justified and “painful but necessary”.

Less than a quarter, 23%, believe the coalition should have made less drastic cuts over a longer period of time to preserve confidence, while 10% don’t believe enough harsh medicine has been dispensed and would have liked to see harsher cuts now to stabilise the economy.

Looking at the economy in general, more than a third, 37%, are more confident than they were 12 months ago, while 45% expect the prevailing conditions to say the same, while 18% are expecting the worst.

The survey suggests positive early signs for the Cameron-Clegg government, with 40% expecting the coalition to be generally positive for the economy.

Just over seven months into the coalition it was no huge surprise to see 40% of those taking the survey judging that  it is “too early to tell.”

Asked about the prospects for the economy over the next 12 months, 52% think conditions will remain as they are, 26% believe there will be an upturn and 22% think economic conditions will get worse.

A strong majority, (72%) of respondents expect bank lending for businesses to remain tight this year and just 18% think it will  increase.

Businesses and advisors see acquisitions, refinancing, fundraising and capital raising the main areas for transactional activity this year.

Philip Rooney, managing partner, DLA Piper’s Liverpool office said: “It is understandable that businesses are still concerned about bank lending for 2011.

“The recession has altered the financial landscape. The main issue preventing banks increasing their lending is the fact that they are focussed on building their balance sheets which is affecting lending among themselves. 

“All the major players are working towards improving this but, until inter-bank lending frees up, businesses will continue to face difficulties in accessing finance.

“Moving forward, some larger corporations may benefit from the fact that there is still money around in the capital markets for those regarded as a good credit risk.

“In addition, we have seen in the property sector major institutions – the traditional source of funding up to the 1990s – willing to consider financing the right schemes. Banks, for their part, are not only willing but enthusiastic to execute quality transactions at the high end of the market.

“However the Government’s attempts to encourage bank lending to SMEs are being thwarted by the fact that banks’ recent experiences have led them to view smaller businesses as being (incorrectly in many cases) higher risk.

“So how quickly access to finance improves and which markets benefit remains very much to be seen over the next 12 months.”

Corporate partner David Cadwallader, added: “We would expect to see increased levels of M&A activity in 2011 as well as increased capital raising as market conditions improve.

“Some companies may also see the opportunity to dispose of non core assets, because the uptick in market conditions will narrow the pricing differentials that typically got exposed in a weaker market.”

How you responded: A selection of comments from our readers to the question: “Do you anticipate cuts to public spending having a direct impact on your business?”

“We have contracts with public bodies that are up for renewal in 2011, they may not renew or want a reduction in costs”

“The public sector has a direct bearing on regeneration and property demand. The cuts have already seen the demise of bodies such as NWDA and the resultant uncertainty will stifle the market.”

“I think that the perception of public sector cuts could be worse than the reality and I think that this will make the public cautious. Unemployment will rise which has to have an impact on the economy in general as I do not believe that the private sector can absorb all of the rises.”

“We supply schools, hospitals and prisons with textile products and could be affected if budgets are cut.”

“While I have some public sector clients, my private sector work is increasing. While budgets are still low for what I do, I am finding there is more optimism at the moment.”

“Taking cash out of the economy will affect all businesses, even those without direct exposure to the public sector”

“Competitors who were heavily reliant on public sector work will now look to replace this by competeing for private sector business.”