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Monday, 12 May 2014

The economy grows, but so does the ‘involuntary’ suppliers’ credit. Mounting stacks of unpaid invoices are not exactly a bullish signal, right?!

During the last months the optimism, about the cautious economic growth within the European Union, dripped from virtually every newspaper and blog-page.

The most-heard statement from political pundits – and some economists – in especially the Northern European countries was: “We have beaten the crisis, due to our cautious economic policy and fiscal austerity. And now, the only way is up, so let’s start shooting the bears with their terrible, unproductive pessimism”.

One of those pundits was Dutch Finance Minister and chairman of the Euro-group Jeroen Dijsselbloem, who personally declared the European credit crisis finished:

By itself the crisis is over now. We are experiencing economic growth in The Netherlands at the moment. This year’s  economic growth will be approximately 1.2% and last year’s growth was 1.4%. So growth is gaining momentum at the time.

Unfortunately, unemployment takes longer to be solved. We hope that the turnaround will come this year, as for many people the economic crisis still lingers on.

The investments of companies are increasing. With a certain delay this will inevitably lead to more jobs, as more establishments of companies  and more production lines will mean that more hands are needed eventually.

However, not everybody shares the optimism of the European politicians about the future growth within the European economies.

One of the parties countering the political optimism about the European economy is an unsuspected one: the pan-European Credit Management Services company Intrum Justitia.

Today, this bureau presented its annual report ‘European Payment Index 2014’, in which a number of key performance indicators have been mentioned, like:
  • the average payment duration for invoices;
  • the forecasted payment risks;
  • the losses caused by bad debt;
  • the expected organic growth rate;
  • the percentage of companies expecting positive change.

Their key message was: “Perhaps, there is economic growth at the moment, but we – our customers and we ourselves – don’t see it happen yet”.

This is a message which is hardly surprising for the regular readers of this blog, but that still stands in bleak contrast with the positive stance of many politicians.

I ordered this EPI-report from Intrum Justitia, but unfortunately, it is a secured document, which is only sent by mail at personal request. It is not available online.

If you are interested in this report, please send me a letter through the email address mentioned in the Blogger profile. Then I will send you the integral report.

Here are the pertinent snips from the foreword by the CEO of Intrum Justitia, Lars Wollung (no link available):

Europe’s recovery from the economic crisis is painfully slow. And, as our latest in-depth survey of European payment behaviour and business sentiment reveals, the downturn’s tail is still wreaking a dire impact on business activity.

Bad debt loss, reported by the more than 10,000 business managers who responded to the Intrum Justitia European Payments Index, increased from 3.0% tot 3.1% and now stands at a staggering €360 billion. And the late payment consequences for businesses pose a real threat to Europe’s competitiveness and social well-being, most survey respondents told us. Rejecting the hype of an economic revival, some 72% of respondents said they had seen no positive change for the better in the last three months – and actually 46% actually expected late and non-payment risks to increase.

The future facing Europe’s 26.2 million unemployeds looks similarly bleak. Some 40% of respondents have no plans to hire new employees due to the severity of late payment. And 26% said late payment had obliged them to dismiss employees.

Against the aforementioned background, many in Europe’s business community must be wondering when they will ever see a normal business cycle again?

The following main conclusions come from the press release of Intrum Justitia’s corporate website:

  • 40% of European businesses managers say late payments contribute to them not hiring, while one out of four European companies say the consequences of late payments include having to dismiss employees, according to Intrum Justitia’s European Payment Index 2014 (EPI 2014);
  • The total bad debt loss for European businesses has risen further from 3.0 to 3.1% of revenues, roughly equaling the cost of 8 million jobs;
  • Nearly three out of four companies in Europe (72%) claim not to have felt any positive impact from economic recovery, while a majority of respondents in all 31 countries surveyed insist they have yet to see any change in the general economic environment.

A stunning 55% of all 10,000 businesses taking part in EPI 2014 say they are suffering as a result of late or non payment of bills and invoices. This is the highest percentage in the history of the European Payment Index with 36% of business respondents believing that their very survival is being threatened by late payment and every second company saying that it prohibits growth.

Even in Germany, Europe’s largest economy, businesses said they are now suffering hard from lack of liquidity. Some 35% of the  German companies said that late payments have a strong impact on steering the need to layoff people. The picture is the same elsewhere with some 30% of UK companies, 28% of companies in Spain and 25% in France reporting the same correlation.

Despite all the talk of an end to recession, the total bad debt loss in Europe has risen further from 3.0 to 3.1% of total revenues, equaling to a total of 360 billion euros for all businesses in Europe. That amount is, in turn, roughly equivalent to 8 million jobs. Every year for the past eight years, the bad debt loss percentage has risen for European businesses.

Late payments accelerate a negative chain reaction for business where lack of liquidity forces downward measures in a degree rarely acknowledged. Hardest hit by the problem of illiquidity are small and medium enterprises.

Very few of the European business leaders surveyed in the 2014 EPI see signs of recovery. 72% of the respondents said that they have felt no positive impact of an economic recovery in the last three months. And that lack of hope goes for a majority of respondents in all 31 countries. In Iceland only one percent and in Sweden two percent of the business managers say they have felt any positive impact of a recovery.
The lack of positive signs goes for Hungary, two percent, and Serbia, three percent, where business managers said that they have felt any positive impact. While business leaders in Lithuania, where 44% said that they have seen signs of economic recovery, are more positive. In Denmark 37%, The Netherlands 36%, Estonia and Spain both 30% said that they felt signs of a general economic recovery.

Key findings for The Netherlands
Picture courtesy of: Intrum Justitia
Click to enlarge
The foreword of CEO Lars Wollung and the accompanying press release emphasize – of course – the need for active credit management. As this is Intrum Justitia’s core business, this is no surprise.

Nevertheless, this is a very powerful statement by Intrum Justitia and it floors the (partially unfounded) optimism of the likes of Jeroen Dijsselbloem, with a flying tackle.
The whole report is a must-read in my opinion, due to the excellent information and charts in the document.

This report emphasizes the enormous void between the make-believe world of promised macroeconomic growth, coming from the politicians in Europe, and the reality-laden stories of SME entrepreneurs in Europe, whose daily business has turned into a day-per-day struggle-for-survival.

The question is:

“What good is a few tenths of a percent of economic growth, when the stack of unpaid invoices and bills on your desk is mounting? And how can this be seen as a bullish signal?!”

What is especially interesting for me in Lars Wollung’s introduction, is that unemployment is actually both the cause for and the effect of the difficulties within the European SME companies:
  • The massive amount of unemployed people generally causes diminished consumption all over Europe;
  • Diminished consumption causes bad daily and annual results among SME companies, which leads inevitably to deteriorating payment behaviour;
  • Deteriorated payment behaviour leads to companies, which must dissmiss a substantial part of their workers, as they can’t pay them anymore and even to defaulting companies, which must obviously fire all their personnel;
  • Dismissed workers lead to higher unemployment again.

This is the whole current conundrum in a nutshell. And this conundrum will not be solved by maintaining and increasing fiscal austerity alone.

National governments and the European Union itself – represented by the European Commission and the European Parliament – must step up their efforts, in order to act as a driver for education, innovation, (fundamental) research, industrial production and development and exploration of financial, commercial and ICT services. 

These key developments will eventually lead the way to new employment and – consequently – economic growth and prosperity within the European Union. Fiscal soundness alone, without economic development, will lead to nothing!

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