Last month I wrote about ongoing
industry worries concerning the deepening credit crunch which has
highlighted the necessity for adequate risk mitigation and business
controls (see Leasing Life, February 2008). Other effects
of the credit crunch are now starting to come through, as my firm
is repeatedly hearing; examples are asset financiers reviewing
their strategy and the impact on people.

There is a strong consensus among economic forecasters, the
markets and policymakers that the UK economy is set to slow
significantly as 2008 progresses. The question that cannot be
answered is by how much? What is also unclear is how long this
downturn will last and what will be its main features. We should,
however, take note of the Bank of England warning of a prolonged
period of discomfort for individual banks and the financial system
as a whole.

It is not surprising in this prevailing uncertainty that some
asset financiers (and some of the “seniors” are amongst them) are
drawing breath and considering whether their future lies in this
industry or, less drastically, in certain sectors, for example,
financing IT.

So what should we expect? Will we see the cautious batten down
the hatches and look to cut costs where possible? Will the
entrepreneurs be opportunistic and have the confidence to
gamble?

Business investment rebounded in Q3 of 2007 but investment
intentions eased towards the end of last year. Will investment
plans now be scaled back? The last significant downturn adversely
affected the IT sector but, today, given the significance of
technology to businesses –indeed their increasing reliance on it—IT
investment may hold up relatively well. We are already seeing a
number of mid-size players struggling to maintain satisfactory
funding lines and the appetite for following ‘new investment’ in
people or ‘teams’ is on the wane.

One authoritative barometer of sentiment among financial
services businesses is the quarterly Financial Services Survey by
the CBI and PricewaterhouseCoopers LLP. One of the January survey
results surprised some people when it was reported that planned
increases in capital investment were higher than three months
earlier and above their long-run averages. Moreover, this was
particularly the case for IT, where plans were at their strongest
since September 1997. The main spur to invest is to increase
efficiency, rather than to expand capacity.

However, the Bank of England’s February Inflation Report
contained further warnings – it cautioned that the weaker and more
uncertain outlook for demand, reduced access to external finance
and falling commercial property prices are all likely to weigh on
capital spending over the coming year.

Crunching the numbers

Unemployment is still at historically low levels and fell in Q4
of 2007, according to government statistics. But, history reminds
us that any economic downturn takes time to feed through to
official data.

The sharp rises in costs, such as energy, are feeding through
into CPI inflation – the government’s target measure – which is
nudging up and they are an imperative to contain or cut costs
elsewhere.

A number of quarters of weak economic growth could prompt asset
financiers to squeeze their HR budgets, trim headcounts and place
increased emphasis on the retention of core personnel. Decisions
may be shaped by their expectations of the magnitude of the
slowdown and how long it might persist, or they may wait to see
what happens. Another factor will be asset financiers’ willingness,
or ability, to hoard staff.

Forward-looking companies will recognise that a tougher market
can be an opportunity to strengthen their talent pool as their
competitors address cost pressures, and they will seek to emerge
even stronger from a downturn.

When the economic climate improves, asset financiers need to
have the right people in place to seize the business opportunities.
If people do not find the job they are seeking in the industry, or
if they are made redundant, their perceptions of the industry mood
could prompt them to look elsewhere, leading to an even greater
talent shortage when conditions improve – not an encouraging
scenario.

We do not, of course, know whether there is more bad news to
come. If there is, investment intentions could nosedive with
investment taking a hammering in 2008. For now, some asset
financiers are reviewing their options while others are waiting to
see what transpires. The economic climate is volatile and we can
expect to see further repercussions for asset finance in the weeks
and months ahead.

Derek Soper is European Chairman and Principal of The Alta
Group, an asset finance consultancy.