HAS Scotland's business community thrown in the towel about seeing any 'green shoots' this year?
Close to it, is my sense. Across the private sector, a mood of despair is setting in. More and more firms are joining 'The Fingernail Club' – desperately hoping for a pick-up in activity and demand. Until all the various stimulus packages start to wo
rk, a slow paralysis is evident: a closing down, and closing in, of business activity, marketing plans and new ventures.
But at private meetings and dinners I attended with senior business people last week, a different concern predominated over what some see as a government-driven witch hunt against bankers that is getting out of hand. The attack on Sir Fred Goodwin's house and car has shocked many and sparked fears that this anarchic vandalism may be a pointer to a more generalised antipathy to business that will spread beyond the banking sector.
At one private dinner of senior bankers and corporate leaders held at Edinburgh's New Club toward the end of last week, conversation was dominated by concern over the breakdown of trust and confidence. Once you start targeting one group, it may not be long before other groups become the focus of government disapproval and public sentiment is whipped up against them. Throughout this meeting, and others I attended, there was despair at the way in which a sour lack of confidence is intensifying and spreading out from the banking and financial sectors across the economy. Few now dare even to suggest a turning of the business cycle, still less 'green shoots', for fear of being howled down for raising false hopes.
The mood in Scotland's capital is particularly bleak. The collapse into administration of property developer Mountgrange and the Bank of Scotland pullout from the £300m Caltongate project in the heart of the city are the latest in a series of development suspensions and cancellations in Scotland, now reckoned to total £2.5bn.
On a broader perspective, the questions worrying business are whether the campaign against banks may be making the climate worse and if loss of trust is now so deep as to prevent a recovery. Others believe the hostility and criticism from politicians over 'market failure' ignores spending waste in the Government's own backyard, the continued growth in non-jobs and the venality of the political class itself. Might this assault now crush the very entrepreneurialism we need to lift us out of this darkest valley?
Business is also divided in its communication to the media. For every executive chiding journalists and commentators for being too gloomy and undermining confidence, there is another insisting that the Government (here and at Westminster) still doesn't grasp how bad it is.
No one gains by talking the economy any further down than it is already. And when individual companies are bucking the trend or doing better than expected, of course they deserve coverage in the business pages of newspapers.
But in the war of attrition between gloom and hope, gloom is winning. The huge problem is that we are caught in a truly global recession. It is impossible for the UK, one of the most open economies in the world, to be protected from this, still less to be able to 'buck the trend' and mount an early and strong recovery. The corollary, of course, is that any sign of green shoots elsewhere is as critically important as one in our own backyard.
Hopes that we may soon be passing the worst of the storm have helped lift stock markets round the world. Bank shares have recovered from the abysmal lows hit earlier this month. But persistent high yields on corporate bonds point to a severe reckoning still to come. According to research by Deutsche Bank, bond indices are priced for default rates of 38% in the US and 50% in the UK – both worse than in the Great Depression.
Little wonder there is a lack of conviction to turn this into a more robust rally. From the Bank of England in the past week have come conflicting signals as to whether the lunge into quantitative easing might have to be reined in (Bank of England governor Mervyn King) or stepped up (MPC member Spencer Dale).
Nevertheless, the hunt for 'green shoots' is on. From Barclays Capital last week came an economy research note titled "Green shoots have arrived". But on the same day came a summary from the respected economist Stephen Lewis of Monument Securities, headed "No green shoots yet". Take your pick.
Let's start with the good news. Larry Kantor of Barclays Capital notes that most components of the credit market have actually improved somewhat since the start of the year, with liquidity conditions generally getting better and both investment and sub-investment grade credit spreads narrowing in most sectors.
The current rally, he says, is likely to have stronger legs than the last one. Market pricing reflects an extremely pessimistic set of economic assumptions that will not be hard to beat. He also says the global recession is starting to bottom out and, although the turn could take some time, "the economic news will go from all bad to somewhat mixed to better over the next three months".
Optimism – or more accurately a step or two away from the extreme of despair – was sparked by statements from Citigroup and Bank of America that both banks traded profitably in the first two months of the year. Then came the long-awaited Geithner package of support for the banks, with a scheme to help and support private sector purchases of toxic assets.
Adding to the sense that the worst may be over came figures showing consumer spending holding up better than expected and a 5.1% rise in US existing home sales last month.
Stephen Lewis counsels caution, citing a fall in the average monthly rate of sales in January and February of 2.8% below the average for the final quarter of 2008, and a collapse in new home sales that continues to be spectacular. He fears heavy job losses will set off a second wave of retrenchment in consumer spending. "With this in prospect it seems very unlikely that the US economy is anywhere near bottoming out."
Any recovery will be pockmarked with setbacks and 'false positives'. And a common feature of recoveries is that company failures and administrations do not peak until a year or 18 months after the turn – the same is true with bank bad debt provisioning. Hence the possibility of outright, 100% nationalisation. The pace of decline should ease soon, but we look destined for a long spell in The Fingernail Club.
