Institute of Directors predicts interest rate rise, which will dampen business returns
The profitability of UK businesses has reached all-time highs, but the Institute of Directors believes that a rise in interest rates in 2016 will make borrowing less attractive for large companies and put an end to the trend of increasing profits.
James Sproule, Chief Economist at the IoD, said:
“We have been living in a world of extraordinarily low interest rates for eight years, and are now at risk of seeing asset bubbles develop. The rate-setters on the Monetary Policy Committee have so far taken a cautious approach, but we believe they will have no choice but to start raising rates this year if they are to get monetary policy back to a position where it could be effective again if we hit another crisis.
“Ultra-low interest rates have promoted misallocation of credit, as larger businesses which can borrow have levered themselves while smaller businesses have not been able to gain a similar advantage. But this trend has almost certainly run its course and any interest rate rise will make borrowing less attractive and, as a consequence, corporate returns are likely to disappoint as the year progresses.”
The IoD thinks that 2015 may have been “as good as it gets” for jobs, with employment even possibly falling slightly from its current record high this year. This will, however, occur alongside a strengthening in productivity, which is likely to return to its long-term trend rate of growth in 2016.
“The outlook for the UK remains positive, but 2016 will see some of the most strongly performing indicators, notably employment and corporate profits, falling back. The last few years have been a good period for larger business, as they have been able to borrow cheaply, and wage growth has been slow. This is set to turn around this year as interest rates finally go up and talent wars intensify.
“The good news is that productivity, whose slow growth has long been a puzzle for policy-makers, will get back on track this year.”