The worst recession for 60 years? Maybe. Maybe not.

Proudly sponsored by

A leadership forum was held by EP magazine and sponsored by Vantis was held in London this week. Mark Berrisford-Smith, Senior Economist, HSBC Bank provided a review of the past year and outlined his views on issues impacting recovery.

He made some thought-provoking points.

As most executives have now reached a point where they are preparing for slow recovery, the event high-lighted both the drivers of the recession and their implications for what is shaping up to be a lengthy period of return to trend growth.

The significant headline was that, from a global perspective, the recession was over but the UK was still lagging behind. It would take three years before we returned to 2008 levels of prosperity. It will be a long climb out.

One of the most interesting points Mark made was that we have experienced a severe downturn, which saw the economy fall by a dramatic six percent. This recession has targeted the business community rather than the individual. However, neither this one, nor the 1980’s recession, was as bad for the individual as the one of the early 1990’s, which saw rising interest rates and was truly threatening. With interest rates so slow in the past year, most people have seen their mortgage repayments be far less and therefore able to save money.

Economic Update - the key points:

Review

From a global perspective, the recession is over; fiscal stimulus packages have worked, so from the third quarter growth across the board has returned except for one obvious exception, the UK.
It is not possible to undervalue the co-ordinated economic response made internationally and government action has been considerably more than in past downturns.
Despite financial markets being the initiator of the recession, it is still a downturn of industry, typified by businesses destocking as demand decreases.
Surveys had shown that the UUK economy probably started to recover in June, when the Purchasing Managers Index increased in May, showing that there had been growth for six months.
However, the official statistics have shown decline, with issues such as North Sea oil rig maintenance, construction remaining weak and government spending weak all affecting recovery.
The services sector has been the most resilient sector over the past few months.
Unemployment has averaged 20,000 per month compared with February when they were around 130,000.
The high street is somewhere between boom and bust - in future, retailers are looking to determine where the economy needs to be in order for them to survive. The emerging view is that if you are somewhere between boom and bust then you will be OK.
Retail spending is growing, albeit not massively, and in a lot of economies that is not the case.

The early 80’s and 90’s – the key difference

Official statistics show that the UK economy has shrunk by six percent, which is on par with the early eighties.
But neither recession has been as bad as the early 90’s, when people either you lost their house and lost their jobs or kept their jobs but faced a rising tide of debt repayments due to higher interest rates.
The housing market has seen a 15-20% fall, but is now rising again, despite predictions of a fall between 30-40%
This recession has been a better individual experience, as there has been a very important cushion for spending.
The Bank of England stepped in to slash interest rates; government reduced VAT and introduced initiatives such as a car scrappage scheme.

Quantitative Easing

The conundrum now is: what to do with Quantitative Easing? It’s possible that the Bank of England thought the funds injected in August were to be the last required, but they have since pumped another £25 billion into the economy in October, taking us to the next review period in February 2010.
The main dilemma is that no-one knows if QE works - some say that it can take two years to have an impact.
There is no doubt that QE has helped large companies’ access cash, but it has not helped small or medium sized businesses or households to the same degree.
Is this a lack of demand or lack of supply? In reality no one knows.
Credit is important when the economy starts to grow again; however, it is less of an issue when in recession.

What shape will the recession take?

The shape of a recession will always be a V or a W as growth is never steady; but if you ignore the micro and look at the macro, I would describe this downturn as being L shaped, with a steep down and a long up.
It will in all likelihood take three years to recover the six percent we have lost in this recession.
The economy is like a patient in Intensive Care: it’s been on life support, there has been an improvement, so it’s been allowed to go home under strict instructions not to return to its old lifestyle.

Three factors inhibit recovery:

1.Finance

Even with government intervention, it will not be enough.
Credit will probably never be as cheap as it was before.
A lot of companies just walked away from this market, and some will never come back.

2. Consumer confidence will take time to recover.

3. Public finances must be put back in order.

What is the end game?
Even when the economy has returned to normal, there will still be a £70 billion deficit, which can only be reduced by spending less and increasing revenue.
The ultimate goal will probably be a debt/GDP ratio of 60%, but this will take a decade to reach.

We have come to think of ourselves as innovative and entrepreneurial but 40% of our growth has come from government, so we need to find new ways to grow and this needs to be driven by the private sector.

The forum’s discussion…

London v. provinces?

Do you see a distinction between London and the provinces?

“London is very different and is benefiting from an influx of tourists especially given the weak pound. London can suffer due to the downturn in the financial sector, but many finance roles have been removed from locations outside London.”

Unemployment

What about unemployment given the issues facing the public sector? Some regions are reliant on the public sector, so won’t the deficit drive up unemployment?

“This depends on the end game and whether the private sector ‘crowds in’ and public sector employees go into the private sector. Equally this depends on the election results. I don’t think unemployment will go above 3 million, but it may not go under 2 million again for at least five years.”

Financial regulation

Is the analogy that the recession was caused by greedy bankers and foolish consumers too simplistic?

“Yes, financial innovation went beyond the ability of regulators to keep up, and this is the challenge for the future. In the nineties it was about IT and the dotcom boom, in the noughties it has been about finance.”

Direction of investment?

Will policy issues such as the low-carbon economy and the digital revolution take precedence from an investment perspective? I worry that there will be less upside employment wise, when compared with pumping investment into key service and employment sectors such as hospitality?

“They are not the key drivers, but they are terribly important. The UK will become a low carbon economy, either for environmental reasons or to reduce reliance on government. Our best option is for lobbying for timely planning and development, and also encouraging governments to give people money in their pockets to spend.”