My articles in previous months have been somewhat depressing and downbeat. This would be surprising to those that know me as by nature I am optimistic. It can be a fine line between optimism and naivety but there comes a time when even the most optimistic of individuals have to face reality.
In economic terms the reality is that the UK is facing its most difficult time in the last fifteen years. By most accounts whilst the UK economy is not in a recession, economic growth is stalling, high street spending is down, house prices are falling and there has been a decline in mortgage lending coupled with confidence continuing to spiral downwards. In the US several accounts suggest the recession has already arrived and Japan shows similar signs. Whilst the Federal Reserve chief Ben Bernanke says they are not currently forecasting a recession he did say that the outlook for the US economy in 2008 has worsened. With the global economy now so interlinked, these signs also do not augur well for the health of the UK economy.
Back on the UK lending front, in 2008 an estimated 1.4 million home owners will be coming out of their fixed rate deals. These homeowners, many of whom may have stretched themselves to get on the property ladder in the first place, enter into a variable rate world which has seen significant hikes in the past year and an apparent likelihood that mortgage rates won’t follow any base rate cuts in a hurry.
Oil prices topping $100 a barrel will put a further squeeze on family finances as energy providers pass on the costs to consumers. Food prices have also seen significant increases and these inflationary pressures somewhat tie the Bank of England’s hands as it looks to balance economic growth with its inflation targets. Late last year, the Bank of England warned that the level of mortgage defaults was going to increase – and this is a situation that is unlikely to show any signs of improvement in 2008. Indeed the Chartered Institute of Personnel and Development predicts that 2008 will be “the worst year since the Labour Government came to power in 1997″ in terms of employment.
As a result of all these factors an area where most forecasters are predicting a significant increase is that of insolvencies, both personal and corporate. On the personal front, predictions vary between 130,000 and 200,000 bankruptcies and IVAs for 2008. The variation in predictions is due to the uncertainty around the attitudes of banks and lending institutions towards IVAs. The feeling amongst insolvency practitioners is that certain banks suppressed IVAs in the past 18 months by placing artificial hurdles in the way of debtors. Effectively they were hoping that the stigma of bankruptcy would mean that the only route then open to the debtor would be an informal insolvency solution such as debt management plan. As I said before, the banks’ bad debt doesn’t become a good debt through an informal solution, it just gets hidden under the carpet for a while longer. Given the Northern Rock fiasco the government may not wish to address the matter just at the minute for fear it may further undermine the already shaken public confidence. It does beg the question how much bad debt have certain UK banks failed to write down?
With the credit crunch continuing to bite the ability by debtors to address their financial difficulties through re-mortgaging and consolidation has decreased significantly forcing more into insolvency. One change on the horizon that may help debtors is the proposal to remove the need to attend Court if the debtor petitioned for their own bankruptcy. This might help people feel there is less stigma in bankruptcy and enable them to grab the bull by the horns and address their finances.
On a final note, it is disturbing that a FSA survey suggests that nearly half of people are more likely to go on a diet or book a holiday than try to sort out their finances in January. My own resolution is that in 2008 I will continue to be optimistic but not naïve in the face of the evidence.
McCambridge Duffy are a firm of leading chartered accountants and one of the largest insolvency practices in the U.K. We specialise in helping self employed individuals. Should your business be experiencing any financial difficulties call free on 0800 043 3328 where one of our highly experienced staff will be available to help you