Cash & Liquidity ManagementCash ManagementCash ForecastingUK economic update raises reforecasting flags

UK economic update raises reforecasting flags

With predictions indicating a slow return to growth, treasurers will need to reappraise their positions

Treasurers must react quickly and with as much foresight as possible in current conditions, says Caroline Stockmann, chief executive of the Association of Corporate Treasurers (ACT).

“When planning, you can’t use trends, really—there isn’t a precedent,” she says. “But if you have systems where you can get access in real-time to data, then you’re in a better position to be able to assess where you are, and forecast more accurately.”

The UK’s GDP rose just 1.8 percent in May, falling short of forecasted growth rates and casting doubts on how quickly the nation will rebound from the pandemic.

The Office for Budget Responsibility (OBR) published three economic scenarios of varying optimism, with the mid-line prediction anticipating public finances returning to pre-pandemic levels by Q4 2022, with the most pessimistic scenario expecting those levels by Q3 2024.

While many organisations have reforecast and re-planned their financial strategies as new data becomes available, the OBR’s prediction for the coming months is far less upbeat than previous predictions, particularly as very few sectors are currently seeing growth.

Stockmann says the general rate of forecasting has sped up as the pandemic progresses, with some organisations moving beyond quarterly forecasts and embracing weekly, or even daily, reforecasts, depending on their size and industry.

However, treasurers working for UK-based organisations have several considerations to take on-board before reforecasting, including the fast-approaching impact of Brexit.

In the global sense, the UK has fared better economically than some developed nations, but countries like Sweden—who avoided a hard lockdown—have fared better economically.

England’s GDP is expected to fall by nearly ten percent, while Sweden’s GDP will only fall by five percent, faring better than its Eurozone neighbours. As such, treasurers whose businesses are primarily focused on Europe, or vice versa, should mitigate their expectations and forecasts accordingly, looking for guidance beyond projected recovery shapes.

Organisations which received financial assistance from the UK government during the pandemic should also consider any interest they will have accumulated by that time, Stockmann says, and factor this into cash and liquidity concerns.

While cash remains king, the UK’s struggling GDP should still be considered in international business transactions, which will impact organisations differently, depending on sector and structure.

“When looking at your risks, geopolitical risk will always be a big one, and you’ll be keeping a tab on it,” Stockmann says. “But other considerations aside, you would want to have business as usual, if you like, and that would be global for many, as you try to diversify your operations and suppliers — depending, of course, on tariffs and other kinds of blockers.”

Organisations may also want to review their multinational supply chains, looking for any potential weak links. It can be useful to compare the economic situation of business-related countries to the global situation, keeping an eye on the state of inflation, but understanding that drastic change is a double-edged sword.

“I think people, in this type of environment, will be absolutely conservative about what they do, whilst around them, there’s a huge amount of change going on,” Stockmann says. “But they will also be looking to bolster themselves up in terms of liquidity.

“People are raising debt through bond issues, equity issues, – there’s a lot of activity to make sure that they’ve got the liquidity they need.”

Currently, the UK’s GDP is sitting far below its February level, with economist Silvana Tenreyro suggesting in a Bank of England webinar that the UK may see an “interrupted” V-shaped recovery, a stance supported by several government economists.

After reviewing the OBR’s scenarios, the National Institute of Economic and Social Research’s (NEISR) analysis anticipates a Q2 slump and minor recovery in Q3.

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