Sunday, 21 March 2010

Is the Car Scrapage Scheme Working

Starting a business during a recession

Duncan Banatyne's view on why

Banatyne's view on the cause of this recession is controversial. "I believe that the problem was caused by the banks lending to each other," he says. "Everybody keeps saying: 'If the banks start lending to each other, they will start lending to the businesses, and then we’ll get out of the recession', but I believe the sensible thing would be for banks not to lend to each other; I can’t understand the concept.

"Supermarket chains build up without lending each other fruit and vegetables," he continues. "If they all lent each other fruit and vegetables, and one was in trouble, they’d all be in trouble at the same time. If the banks separated from each other, and didn’t borrow from each other, they wouldn’t have the problem."

"Instead, they’ve borrowed from each other and given each other security packages, which are less valuable than what the bank is borrowing on it. If they were completely self-contained, and one of them went bust, like Northern Rock, the rest then could come in and take the pickings, and a few jobs would be saved, and it wouldn’t be such a big issue. If the supermarkets went bust, that’s what would happen. There would be a few casualties but there wouldn't be a problem on this scale.

"The banks should all borrow from the Bank of England," he concludes. "One main source. Otherwise, it's the same money moving round - the same pot that people are taking bonuses from, and eventually there is no money left."

Why Was the UK hit so hard


Financial Services

This recession is affecting all sectors from the car industry to retail, but, the finance sector is one of the hardest hit. The finance sector is one of Britain's most important sectors in terms of foreign currency earnings and national output. (The sector also makes a significant contribution to income tax and corporation revenues). With hedge funds and interbank lending both declining the Finances sector is in deep recession and rising unemployment.

Housing Market

The UK is not the only country to have a boom and bust in house prices, but, in the UK, the rise in prices was one of the largest. The fall in UK house prices has been one of the sharpest. Also, the UK has one of the highest rates of homeownership in the world. When house prices fall, it has an almost paralysing effect on the economy. The decline in wealth and confidence is a powerful negative impact on consumer spending, once a mainstay of the UK economy.

Low Savings Rate.

The strong period of economic growth in 2000-2007 was driven by consumer spending. The UK saw a rise in personal borrowing and a dramatic drop in the savings rate. In August, 2008, the savings rates was less than 1% - an historical low; compare this to a savings rate of 10%+ in 1994. People are highly indebted and the recession has been a stark reminder of this. I feel we have gone from an attitude of carefree spending to a new attitude of frugality as we try to improve our savings ratio. There is a sharp demand for higher savings.


The figures from the Insolvency Service marked the depth of the recession, with 35,574 people declared insolvent in the last three months of the year.

The number of businesses going bust also rose to a new annual record in 2009, with 6,355 going under.

Over 2009 as a whole, there were 134,142 people declared insolvent in England and Wales. This was up 26% compared with 2008, and higher than the previous record - in 2006 - of 107,288. Records began in 1960.

17,007 bankruptcies

This is a result of increased creditor pressure which is unlikely to let up any time soon
In the last quarter of 2009, the number of companies going bust fell by 7% to 1,465, compared with the previous quarter.

For the whole of 2009, the number of firms being liquidated rose to a record 19,077, an increase of 23% compared with the previous year.

Impact on Firms

More than 140,000 companies fell into financial trouble in the final three months of 2009 as experts today warned the worst was yet to come for recession-hit firms.

lack of preparation

"With tax and interest rates certain to rise, as well as increasing pressure on consumer spending, there is every reason to suggest that the insolvency peaks of this recession remain some way off."

car scrappage scheme failed to prevent a 26 per cent surge in car firms falling into "critical" financial condition quarter-on-quarter, with the number also up by a fifth on 2008

The temporary VAT reduction, which came to an end on January 1, helped contribute to a 32 per cent decline in retailers suffering critical problems compared with the third quarter, down 21 per cent year-on-year.

Scotland saw the highest number of firms hit financial woes at the end of 2009, while it was also the only region to see a rise against a year earlier.

The UK Economy Coming out of recession

The UK economy has come out of recession, after figures showed it had grown by a weaker-than-expected 0.1% in the last three months of 2009.

last week, UK unemployment fell for the first time in 18 months.
The UK's had been the last major economy still in recession.

the UK's production and service sectors each grew by 0.1% during the quarter.
The ONS figures also showed that GDP fell by a record 4.8% in 2009.

The UK recession began in the April-to-June quarter of 2008, and was the longest UK recession on record.
During 18 months of recession, public borrowing increased to an estimated £178bn, while output slumped by 6%.

Chancellor of the Exchequer Alistair Darling said he was now sure that "we are on a path to recovery.
"I'm confident but I'll always remain cautious".