Credit Crunch

Credit crunch: Can we bank on it?

Dr Damian Ward is Senior Lecturer in Economics at Bradford University's School of Management. It's a job which has put him in the position of advising business managers across Yorkshire on how they might survive the current economic storm. We thought he might be just the person to explain what significance today's gloomy economic headlines might mean for you and me here in West Yorkshire.

Damian: Answering our questions

What exactly is the 'credit crunch'?

If we compare it with the situation 12 months ago, many banks and other financial institutions found it very easy to borrow from the money markets in London. Where they would previously have borrowed from customers and savers, lots of them were going to what we call the wholesale markets and raising credit there.

The people who were lending that money no longer wish to do that, or think there's an increased risk of doing that. That's the 'credit crunch' - there just isn't any credit around for the banks to tap into so there's no credit for them to pass on to their customers.

Is this why banks have been to trying to raise money from their own shareholders?

Yes. What that effectively does is to strengthen their financial position so they can either use that to lend to customers or they can use that to improve their credit rating...The other thing that they are beginning to protect themselves against is bad debt going forward so if a recession really does happen and customers start to default, then the banks need some cushion to protect themselves against that.

To Let: But who's taking the plunge?

Banking is quite an important industry across West Yorkshire so will their fortunes have a knock-on effect here?

I think you've got to be concerned about West Yorkshire's reliance on the financial services industry. We can pick out some big financial organisations in and around Bradford and West Yorkshire. There's the Bradford and Bingley, the Yorkshire Bank, the Yorkshire Building Society, the Skipton, and HBOS has got an enormous presence here. And that's not to mention some of the legal services in Leeds which specialise in finance, and the accounting firms. It's a phenomenal employer and it's very much on the radar of organisations like [regeneration agency] Yorkshire Forward - if the banks begin to cut back on their activities then we've got to be worried about employment in the area.

It's very easy to still associate West Yorkshire with 'dark satanic mills' but is it now the case that most jobs here are actually in the service and finance industries?

They are, and some of the comments I've received from people in the industries is that some of the jobs in the financial area are not what we call the high value-added technical senior management roles. There's lots of processing and operational activities and that's where a bank is going to look to cut its costs - how they can do things more leanly, more efficiently. So there is a risk.

Would you see the 'credit crunch' affecting any other sectors of West Yorkshire's industry?

No more than anywhere else. It's just going to be those businesses who have not prepared themselves for a recession and the issues are the same as those which face the banks in a recession - that's liquidity (how do you keep cash coming into the business?) because the banks are not going to provide it with overdraft facilities and extensions on loans because (1) they don't have the money and (2) they don't want to take the risk. It's going to be very important for companies to think carefully about who they are trading with, what credit terms they are doing, how they manage those creditor relationships and how they make sure they've got cash constantly moving through the business.

Are we on an inevitable route to recession?

It's not an inevitable route, and there are some people around who are saying it's actually better than it looks. I don't agree. I'm probably more of the persuasion that we are going to go into a recession in some shape or form. There's a textbook definition which is two consecutive quarters of negative growth...For lots of us - even as economists - it's a completely useless definition. Lots of us feel that if the economy is slowing, if consumers don't feel confident, and unemployment is on the increase, then it's a recession or it's something to be concerned about. I think lots of these things are there already. GDP [Gross Domestic Product] is slowing down, there's no doubt about that.

Consumer confidence: Heading downwards?

Consumer confidence is being dented, business confidence has been dented and there are some signs that unemployment is beginning to increase. Where unemployment is increasing is in the construction industry because the house builders are pulling out of the market...What people are saying is that if you are not moving house then you are not buying curtains, you are not buying a couch or a new plasma TV with a big screen. If there's a knock-on effect from this, then we could be more certain of saying whether we are in a recession.

Do you think this could have a big effect on West Yorkshire? We've got a lot of mills which are now being converted into 'apartments'?

Those sorts of things are going to be hit quite hard in the Bradford area. First of all, we've been very slow in comparison with Leeds and Manchester into moving into that part of the economy and the regeneration of some of those mills. I think equally we'll be very quick out of it and I think that's because of the population we've got in Bradford, and how it's dependent on jobs outside the city. Businesses are going to be thinking to themselves, 'Will I shift [properties] in Bradford? Are the banks willing to lend?' In particular and in terms of locations, will it be worse than lending to someone who wants to buy a property in Leeds? The banks will think like that and that's why they've pulled out of these apartments saying, 'I think they tend to be overpriced as new buildings or conversions' so they tend to go to 'buy to let' or to first time buyers on very high loan-to-value ratios so everything that's associated with these types of properties is everything that a bank doesn't want to be associated with. In that sense, yes, Bradford could be hit quite hard.

Broadway: Could the 'crunch' hit here?

You look in the city centre at the potential development of the retail space and again the construction company is going to be saying to itself, 'Who have we got lined up as potential tenants?' and the retail companies are going to be saying, 'What does it cost me to be in Bradford? What sort of customer do I get in Bradford? What kind of revenue spend per square foot do I get in Bradford?' and they are going to be reticent about coming here.

Could this slow down attempts to bring more life back into the city centre?

There are some great developments around City Hall and they are trying to wash these out into the Broadway area and it could slow that down quite remarkably.

You mentioned that people in Bradford tend to work outside the city. Why is that?

I suppose that's because we've not been very good in transferring our industries from what we had in the mills and engineering into the new sort of service-led economy and Leeds has been very good at doing that. You can look at the census data and the traffic flows between the two cities on a net basis and see that Bradford contributes more to Leeds in terms of work and employment than Leeds does to Bradford. You've got to think what that means for the economy. There are 'x' thousand people going over to Leeds every day and spending in the city. That's not happening here. What does it mean for property values in both cities because if you work in Leeds, you might prefer to live there? I don't think we've been as successful as they have.

Do you see any way out of a possible recession?

There's not much scope to alleviate this slowdown in economic activity. The government can't do anything - it's got a large budget deficit which can only be 3% on GDP so there's not much scope for the government to go out and borrow to spend. There's no scope for the Bank of England to help us out because the Bank of England has been told that inflation is the greatest evil and so that's the priority. You have to trade the two off against each other - you can have low inflation and slowing growth. That's just the way it is so there's not a great deal that can be done there.

Pulling power: The road from Bradford

How long we will be in recession is an interesting point because what concerns me is that when we did have boom-bust economics then senior management inside organisations had experienced a recession before so they had an idea of what strategies enabled a firm to survive through the boom-bust cycle. I think because we've had more than 15 years of what we can call non-inflation, constantly expanding - this 'nice decade' as Mervyn King [Governor of the Bank of England] likes to talk about - is that we've had a generational change in senior management. There's lots of people in key roles who haven't experience of managing a company through recession and that's got to be a worry!

So what do you think all this will mean to people in West Yorkshire?

It's going to be a difficult couple of years because prices have gone up and incomes will stagnate at best. At worst there will be unemployment...There's an enormous amount of debt that we've built up over the last 15 years, not just mortgage debt but secured personal loans and credit card debt. The servicing of that debt, with stagnating incomes and rising prices, is going to be difficult. There's going to be a lot of adjustment out there for consumers and for families. It's not going to be apocalyptic but it's going to be challenging going forward...I think we'll survive it but I don't think it's going to be a six or 12 month blip. Something like this has been in the offing for a number of years and we've now got to the point where it is definitely going to happen.