Bank of England Governor Mervyn King may not qualify as a fully trained Met Office weather forecaster, but his recent pronouncements about the economic climate blowing in from the Euro-zone and the potential impact this could have on the UK should not be ignored.
Last month Mr King warned of “the risk of a storm heading our way from the continent” on the back of the continuing slide of the Greek economy and the fact that many European banks were entirely dependent on funding from the European Central Bank to keep going.
Since the banking crisis really gripped us in September 2008, businesses of all sizes have been dealing with the subsequent recession and the lower business confidence that resulted from the continued uncertainty about the global, European and UK economic landscape.
In Scotland, the fall-out has manifested itself in various different forms with some sectors taking a bigger hit than others. Access to bank funding generally remains a challenge for many businesses while there are others who continue to repair their balance sheets by reducing borrowing, all of which is resulting in lower investment in many parts of our economy.
And just when economic data was beginning to indicate that our economy was beginning to move in the right direction, the re-emergence of a Euro-zone crisis has put all that at risk.
Greece’s continued uncertainty about its political direction and a possible rejection of tough austerity measures which could result in their exit from the Euro, combined with other concerns, including Spain’s banking sector, has real potential to throw water on any prospect of recovery.
The substantial fall in the stock markets and the slide in the value of the Euro only highlights the significance of this new and very unwelcome phase of uncertainty.
While the total break-up of the Euro-zone, as was being floated by some commentators, looks remote at this stage, a Greek exit from the single currency certainly does look a much greater possibility than it did a few months ago.
Such a move would bring us into unchartered waters, especially considering the potential for contagion to certain other troubled Euro-zone members such as Portugal, Ireland, Spain and Italy.
While the severity of Mervyn King’s predicted storm is very much uncertain, these events on the Continent are almost certainly going to affect some Scottish companies and they will have an impact on our economic well-being. Many of the firms I speak to are increasingly concerned about the ongoing Euro-zone developments and what they might mean to their businesses.
The key thing for any company to do in such circumstances is to take a lead from our banks and consider the potential consequences under the various possible scenarios.
Mr King revealed how the Bank of England, Treasury and Financial Services Authority were drawing up contingency plans to safeguard the UK financial sector in the event of an intensification of this current crisis. Scottish businesses need to do the same.
Firms need to consider a number of important issues, starting with current exposure they may have to another shock to the banking system. How would a fall in rating of a bank where they have deposited funds impact on their business?
Companies which sell into the Euro-zone need to consider if there is additional action they can take to protect any outstanding invoices due to them. It may be the case that already hard-pressed customers on the continent are already seeking an extension in payment terms - it’s important to look into the viability of their business before agreeing to this or they may be increasing their bad debt exposure further.
Of course, it’s easy in theory but difficult in practice when dealing with customers but I would advise firms operating in stressed Euro-zone countries to look now at potential ways of mitigating their exposure to further economic turmoil in these markets. Given the current problems of the single currency, it is also worth companies considering how they can best manage their exposure to Euro-denominated contracts and other Euro assets.
It is impossible to predict the outcome of this current Euro-zone storm and the exact impact it will have on Scottish business. However it is possible to consider and plan for it to minimise the exposure from it.
With the dark economic clouds gathering, it is more important than ever for Scottish business leaders to keep an eager eye on events on the continent and the global economy.
I believe that businesses should however continue to pursue a clear strategy and exploit the opportunities that the markets offer. As with any economic storm, there are always opportunities to be found for those businesses that know how to adapt and develop an offering that can really compete in today’s markets both home and abroad.
