Macroeconomics and leasing
Industry experts are connecting geopolitical turbulence with the health of regular SMEs
Since 2016 there has been momentous occasions in international politics that has upended traditional ways of thinking. While there have been headline events such as the election of Donald Trump to the presidency and the referendum decision by the UK populace to leave the United Kingdom, signs such as the ECB considering rising interest rates can be of equal significance to the world economy.
This can all relate directly to SME lending. Speaking at the Leasing Life conference in Tallinn, John Rees, chief commercial officer, Société Générale Equipment Finance, sought to explain exactly how.
“We should be very conscious of the geopolitical environment and future growth prospects. If we believe this analysis, we are going into this era of lower growth and rising default risk. This should be the biggest concern for our industry going forward” says Rees.
The financial crisis of 2007-2008 affected leasing companies through an often sudden prevalence of SMEs defaulting on repayments. In the current cycle, Rees frames it as such: The increased likelihood of missing a leasing payment is something that must resonate, we're all experiencing an increase in our receivables, we're seeing companies start to slightly struggle.
“We're seeing a point where a lot of companies could become cashflow constrained. They need to be able to service their debt levels and they need to convert their economic model into something that is profitable and cash generative as well. We all know companies don't fail because they don't make profit, they fail because they run out of cash and that stops them being able to service their debt.
“The ECB is gradually starting to withdraw certain types of funding. Its expansionist monetary policies are slowly changing.”
From the American side of the market, the position of Rees falls into the position of cautious optimist. Trump’s presidency has been warmly received by American businesses, and both the stock market and US dollar have seen renewed strength: “The fiscal stimulus that Trump's politics have put into the US economy have worked and that there is an incredibly positive economic environment in the US but at a point in time it has to stop being driven by a fiscal stimulus policy and start being driven by something which is much more fundamental like consumer habit and investment. We also need to keep an eye on the trade tensions between the US and China.”
"We can focus on the European economic environment but you can't have a European economic environment without the US having an impact on t hat."
From the European perspective, Rees may be more of a cautious pessimist: “Here you have an example of all those different geopolitical organisations which are piling up, and which are having an impact on regular SMEs. The budget in Italy was rejected by the EU, there is Brexit. As an Englishman living in France I'm not going to pretend to be an expert on Brexit but what is undeniable is that you have this accumulation of political uncertainty.”
The long road to recovery since the catastrophes of 2008 has now established a relatively sanguine economic environment. There are still economic positives both in the Eurozone and across the Atlantic, and companies are continuing to invest. Yet the talk by Rees indicates awareness that the growth mode of leasing may be coming to an end, and that leasing companies could pay if they are in denial over this.