Understanding The Recession

Understanding The Recession

“In the business world today, all is not quite as it seems”

UNDERSTANDING THE RECESSION This article was written in early 2009. Although we are technically out of recession the business conditions are little actually changed and the forecast of economic behaviour has proved accurate.

Directors will find it helpful to reflect on the prescription/exhortation towards the end.

WHAT'S REPORTED The "Credit Crunch" and the recession have been the focus both of the media and most business people for the last 6 months. There is no doubt that there have been significant effects on the UK economy and many people and businesses have suffered directly as a consequence.

If your business is in real estate or related to the motor manufacturing industry for example your turnover has probably been hit very hard. If you worked for Woolworth or MFI to name two of the companies that are losing their entire workforce then you have the sympathy of most people.

The problem with anecdotal reporting is that it gives the impression that the entire country is facing the same problem. Indeed, if you ask any successful journalist the secret of good journalism they will tell you that it is the ability to make a story seem relevant to the reader or listener personally.

The consequence is that we are told that we are facing the worst recession in living memory and that the credit crunch is an unparalleled event of dire proportions. The general impression is that we are facing a crisis akin to the last World War or the great depression as described in the literature of suffering.

Fortunately, journalists also report the figures and they are, in most cases, accurate. True, but the way they are reported is critical and a determined reporter can turn even good news into bad - I heard the other day that Tesco's growth had declined by 2% to 1.5% - the country’s biggest retailer continues to grow is reported as evidence of the dire straights of the economy. And while I have every sympathy for employees of Woolworth, it is wrong to blame its demise on the

recession, as the media has been doing. They had patently lost their way many years ago and a glance at their figures reveals profits last year to have been less than 0.3% of turnover.

REALITY - THE ACTUAL FIGURES

To understand what the recession really means requires us to look at the figures themselves and appreciate their actual implications.

The key figure is the forecast decline in GDP. Forecasts come from a variety of sources and in the nature of such things they are unlikely to be 100% accurate. However, there are currently a number of estimates from respectable sources which range from 2.5% to 4% next year with growth returning during the fourth quarter or early in 2010. The latter figure of 4% was by the Governor of the Bank of England, which had been consistently underestimating by comparison with all other sources and this appeared to be an attempt to redeem their reputation by overestimating everyone else.

That means that total economic activity is going to decline by a small amount!

The figures are however not straight forward. The method of calculating GDP also includes government expenditure some of which goes to the commercial sector but some of which goes in welfare payments. Broadly speaking it is fair to say that the commercial sector is likely to an experience a decline of between 3.5 and 4.5%. Still not much in real corporate terms.

You must then factor in two other effects. The decline will not be felt evenly. Some sectors will face (and others have already faced) almost catastrophic declines and others will see significant falls but for many there will be little change and others will continue to grow. When you appreciate that the car industry employs almost 11% of the UK population in work and it has seen a decline in sales of almost 50% you realise that it accounts for a very large proportion of the total decline in GDP. Add to that the effects

being felt by the construction sector and you realise that most of the rest of the economy will see very little real decline Discounting has already become fairly common. A reduction in prices of course reduces GDP itself so that a significant amount of the reduction is not in actual activity but a direct consequence of the business response.

Unemployment is a significant problem for those that are made redundant but it is important to understand the real meaning of the figures. Before the recession started there were approximately 30m people working in the UK. This means that a rise in unemployment of 500,000 represents just over 1.5% of the working population.

The continuously repeated reports of yet more redundancies gives the impression of total meltdown. It is made worse by the realisation that for the individuals concerned the situation is very unpleasant and most of us can identify with them and fear for ourselves. The real tragedy of recession is that its effects are not felt equally! They are borne by a small proportion of companies that fail and a small percentage of the population.

The effect of the recession will actually be to take the country back to a level of GDP similar to that of two years ago, a time when we all felt we were prospering and generally living better than ever before!

CREDIT CRUNCH

In addition to the recession is the shortage of available credit caused by the banking problems. First, reflect on the fact that they have been criticised for lending too much and now we are criticising them for lending too little, in riskier times, when they themselves have reduced liquidity. We can't have it both ways! It is good to have somebody to blame and a really good target – for media and politicians – is a group where a comparatively small number have clearly enjoyed excessive salaries and bonuses.

However we are not concerned with the past but with working effectively with the current situation and in the future. There is, simply, significantly less cash available to fund a small reduction in commercial activity! And where banks are able to make it available they will seek to reduce their risk. This means taking more security and increasing the margin between the rates at which they borrow lend. This is a rational business model and complaining about it is pointless.

THE IMPLICATIONS

So what does this mean in terms of the effects business will feel?

•

Most markets will see a comparatively small decline in demand or continued growth.

•

The size of any decline, for most, will be of an order that vibrant, creative, flexible companies can make up by increasing market share.

•

Those companies will prosper at the expense of those that adopt a passive, reactive approach

•

A few markets will see significant declines in demand. Their responses will have to be of a different order if they are to survive.

•

The perception of the economy will affect buyer behaviour rather than total volume of purchases

•

All companies will face significant challenges to the management of their cash flow.

•

The lack of available credit will also affect buyer behaviour

If you are one of the unfortunate companies that is in a market that is suffering potentially catastrophic declines in demand then your first step must be to ensure survival.

If you are one of the majority who should be looking at how to change the recession from threat to opportunity: Talk to us to explore your options in more detail.

E: d.willox@essenceofbusiness.com T: 020 8199 9333

©David Willox 2009 David Willox BSc. FInstIB. Email: - d.willox@marketfocus.biz