Cut to the bone

A poster reads: "why should we pay for their crisis" near the University of Oxford. Consumers' confidence were depressed after the British government announced the economy shrank for the first time in 16 years in the third quarter and many economists expect further contraction through next year before only a small recovery in 2010. The Bank of England recently served up a surprisingly large 150-basis points interest rate cut.

Britain's business secretary Peter Mandelson urged US president-elect Barack Obama last Thursday to embrace free trade and resist protectionism.

Mandelson told a House of Lords committee he believes some of Obama's fellow Democrats want Obama to restrict imports in an effort to protect American jobs during the economic downturn.

"Mr Obama has a pro-market approach, including government action to support markets and distribute their fruits more fairly -that is something he has strongly in common with the British government," Mandelson tells a hearing of the Lords' European Union committee.

"But inevitably he and others within the Democratic Party are concerned about the impact of globalization on American workers and industry. This could lead to Democrats becoming more skeptical about the virtues of free trade and market openness," Mandelson says.

Prime Minister Gordon Brown has said he expects to cooperate closely with Obama. Brown said last Wednesday he looks forward to cooperating with Obama's administration "as we both help people fairly through the downturn".

Mandelson was EU trade commissioner from 2004 until last month, when Brown recalled him to London to serve in his Cabinet.

Mandelson, who sits in the House of Lords, urged President George W. Bush to use his final months in office to finish the long stalled Doha round of global trade talks.

In another development, Mandelson said last Thursday that Britain will strongly support Pascal Lamy's bid to serve a second term as head of the World Trade Organization (WTO).

"The British government will certainly be supporting him very strongly indeed," Mandelson said while appearing before a parliamentary committee.

Mandelson, who was the European Union's trade commissioner before joining British Prime Minister Gordon Brown's Labor government last month, praised Lamy's "Herculean effort" in trying to secure a successful conclusion to the Doha round of trade talks which ultimately stalled in July.

Due to the financial crisis and sluggish business and trade, Britain's smaller companies are in desperate need of prolonged and sustained interest rate cuts if there is to be a reduction in the alarming rate at which they are folding.

The Bank of England (BoE) on last Thursday served up a surprisingly large 150-basis points interest rate cut which also served to highlight the severity of the economic downturn.

For John Johnston, director of institutional sales at brokerage Seymour Pierce, it was too little, too late for smaller companies, particularly those with debt issues.

"They (the BoE's Monetary Policy Committee) are at least three months behind ... they should have been more proactive and now they're playing catch up," Johnston says.

Smaller companies, which usually lack the international focus which allows larger groups to hedge their risks across markets, have been hard hit in the downturn.

The effects of the credit crunch can be seen in figures from the Federation of Small Businesses (FSB), showing 280 smaller business are closing each week, up from 40 before the downturn.

Begbies Traynor, an insolvency practitioner, says its statistics showed a 16 percent quarter-on-quarter rise in businesses classed as having significant problems.

Executive Chairman Ric Traynor says rate cuts were imperative to kick start a recovery, adding rates must come down and stay down before the real cost of borrowing for smaller companies falls.

"We've gone from one extreme to the other," says Traynor. "Where once any business could borrow virtually any money, we're now in a position where even good businesses can't borrow enough to see themselves through the downturn."

As credit lines have tightened, the plight of the around 1,600 UK listed smaller companies has been brought sharply into focus.

Debt control

The FSB says 51 percent of smaller companies are suffering from late debtor payments and there has been no improvement in bank lending despite political pressure on the banks to lend.

Andy Berrow, a senior business advisor at Businesslink, a free regional business advice and support service, says it was important companies did not become a bank themselves.

"It's making sure you've got a good policy on debt control, making sure you know what you're owed and that it's coming in on time... and you're not paying too quickly, and do you need to spend cash to buy items or can you look at leasing?"

The corporate sector's struggles are not confined to smaller companies, but stock prices illustrate how much more vulnerable such companies are perceived to be.

The FTSE Small Cap index has fallen some 42 percent this year, against a 33 percent fall in the FTSE 100.

Chris Ward, managing director of Abbey Protection, which offers legal advice to companies looking to implement redundancy schemes, has seen a 70 percent increase in enquiries and said long-term planning was needed to survive.

"It's part of any good, sensible business planning that before you have to take that kind of decision (making employees redundant) you need to examine all other options," he says.

At JCB, which makes earth-moving equipment, employees have taken a 50 pounds ($79.47) a week pay cut in order to save 350 jobs. Ward said others may replicate the move.

Clive Sayer, chief executive of quantity surveying group Baqus, listed on the junior AIM stock market, said now was the time for businesses to be investing in their futures.

"In the past I spent too much time being a quantity surveyor and not enough time marketing the business. This time we're out there speaking to people ... it's paying off and we're still winning work," says Sayer.

The British economy shrank for the first time in 16 years in the third quarter and many economists expect further contraction through next year before only a small recovery in 2010.

Businesslink's Berrow says he had been advising clients not to cut marketing or sales would inevitably fall. "Small businesses will always survive because it's where the entrepreneurs live and they're the ones that see an opportunity and make money from it," he says.

Shortly after the BOE's move, the European Central Bank also cut interest rates by 50 basis points on Thursday and signaled another reduction was possible this year, as inflation pressures ease and the euro zone faces its first recession.

"I don't exclude that we could decrease rates again," ECB President Jean-Claude Trichet told a news conference, after being asked about expectations for another move in December.

"We are not pre-committed in any respect. We'll do whatever is necessary to take into account the situation as it will unfold progressively."

He said the ECB's Governing Council also discussed cutting rates by 75 basis points but was unanimous in its decision to lower them by 50. Some policymakers may have mentioned a 25 point cut but a 100 point reduction was not discussed, he added.

Last Thursday's widely expected move, the second such cut in just under a month, took the ECB's benchmark rate to a two-year low of 3.25 percent.

Agencies

(China Daily 11/10/2008 page11)