Blackfriar: Vicious circle that keeps cash stashed away

AFTER surviving the ravages of the credit crunch and recession, it’s little surprise Britain’s biggest companies are now opting to hoard their cash rather than spend it.

Profligate spending and over-reliance on credit, by households, businesses and governments alike, were key causes for the current state of the economy.

Examples of corporate exuberance in the run-up to the credit crunch litter the business world, in Yorkshire as well as further afield.

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Sheffield-based high tech materials company Dyson Group was forced into a debt-for-equity swap with its banks after entering the downturn with a heavy debt burden.

Miner UK Coal is still working out how to cut debt to a viable level and forge a sustainable future.

Others, such as York-based housebuilder Persimmon, are not prepared to return to a net debt position if they can help it. Having achieved the Herculean task of wiping debt out completely from £1.2bn in April 2008, it plans to advance with a “zero debt model”. Meanwhile, shareholders will benefit from its plans to hand them £1.9bn over the next decade.

Forecasting group the Ernst & Young ITEM Club says until companies (non-financial) start spending the £754bn they have stashed away – 50 per cent of GDP – Britain’s recovery will remain stalled.

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Professor Peter Spencer, at the University of York and ITEM Club chief economic adviser, said: “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy.

“Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.”

But who can blame corporate Britain for being unwilling to commit to investment? Companies are caught in a vicious circle of low consumer confidence prompting low business spending.

Few will risk eating into their precious cash piles until demand is clear and entrenched.

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Yesterday, after months of collecting downbeat views on investment, the Bank of England’s agents’ report suggested a glimmer of hope.

“Investment intentions pointed to a gradual rise in expenditure on capital over the coming year, and plans had strengthened a little in recent months,” said the report.

“That reflected a slight improvement in sentiment, as contacts’ worst fears concerning the euro area had not materialised. And some firms had decided to press on with investments despite continued uncertainty about the outlook.”

Those manufacturers most likely to spend were, unsurprisingly, exporters.

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There were even a few reports of plans to bring production back to the UK from abroad.

But with the past four years etched deeply into directors’ minds, these are tentative steps.

Much more economic certainty is needed before companies begin to seriously dig into that £754bn.

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