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The realities of recession
And so it's here. We are now finally in recession. Actually it doesn't count as a recession unless there is negative economic growth in the last quarter of this year but only the seriously delusional would expect anything other than that scenario.
This means that the total sum of economic activity has shrunk compared with the same period last year. According to the official figures, the UK economy was half a percent down on 2007. That doesn't sound so bad - after all, we could all afford to tighten our belts by half a percent. In fact it is worse than it appears. You have to compare it against what would have happened if we were not in recession. Trend growth, (the normal level of growth) is around 2.5%, therefore we have lost 3% points. Over the year this amounts to well over £100billion. That is a lot of jobs, a lot of retail sales and, in short, a lot of pain.
To those of you working for well-funded and well-managed companies your jobs are probably secure. In our industry any cutbacks made on head count will be made mostly through natural wastage. Interestingly I noted that even the retail banks were recruiting in the last issue of The Appointment. It is those companies that are sailing close to the edge that are likely to fail and, in this particular recession, those who need credit who are going to feel the pain.
The worst of this recession is going to be felt in the financial services sector and property. Any estate agent will tell you that the housing market is now dire. In London it is reckoned that, on average each estate agent's office is on average selling just one property a month. That will barely pay the rent on their office.
Should we care what happens to estate agents and city bankers? Well, yes actually. You may think that they do not earn their money, which is most cases is unfair, but whether they earn it fairly or not, the fact that they are not earning it now means they are not spending it in your shops. That means your bonuses and commissions will also be squeezed so that you cannot spend money in the shops and restaurants. We have now covered more than 25% of the workforce not spending money which means that there are few VAT receipts and less income tax going to HM Government. Who cares about that? You should. This means that they will either have to raise taxes or make cutbacks throwing more people out of work. Even more people who cannot spend money in your shops. It is the nature of recessions that this vicious circle continues until confidence returns and that very much depends on policy makers and us.
There is a silver lining to all of this gloom. Those of you thinking of buying a house for the first time will certainly be big beneficiaries of this downturn. Also, interest rates are about to start falling sharply and could well be the lowest in modern history by the New Year. A side effect of this is the fall in the value of the pound - which has already dived in anticipation of those low interest rates. This will certainly attract tourists as it will mean shopping for foreigners here will be cheap. This flip side is of course you probably don't want to be planning expensive foreign holidays just now. You will find going abroad very expensive for the foreseeable future.
There has been a lot of doom-mongering in the press and a lot of misinformation. The two most useful statements said by "commentators" have actually come from our own industry. Simon Wolfson, CEO, of Next has been on TV a lot recently and it's quite refreshing to hear an honest and straightforward view on what is going on. Mr Wolfson rightly says that much of the retail industry has been in recession for the last 18 months and has learned to deal with it already. Retail is always going to be first in to recession and will also be the first out. My prize however for the most sensible and simple view on what needs to be done came from Sir Philip Green. Like many of us the Arcadia boss has seen recessions before and he says that retailers "are all going to have to work harder" in order to get through the economic storm. Sir Philip placed great emphasis on taking positive steps to engage with the current challenges rather than wallowing in negativity - acting like a victim is not the way out of a recession.
For many companies this will be an opportunity. All companies will hurt but the strong will survive, the weak and inefficient will not, leaving a clear run for the stronger companies once the upturn begins. Remember this - there have been around 20 downturns or depressions over the last 200 years. They always come to an end.
