'Green Shoots'
Tuesday 7 April 2009 at 01:12 Something strange is going on. Business confidence in the services sector is returning even if export-led manufacturing is in dire straits. House prices appear to have stopped falling. Banks seem to be getting ready to lend substantial sums in the late Spring.
Service Collapse - A Sign of Better Times!
One sign that domestic demand is holding up a little better than expected is the paradoxical problems so many of us are having with service suppliers. I have decided not to embarrass them but many suppliers of basic services to us have screwed up in some way recently and it is not because they are bad people.
Think back to November 2008 and the dire predictions of disaster, including ours. The natural reaction was to cut costs. Banks were not lending and some badly managed or unlucky companies, especially those related to retail or property, were going to the wall.
The obvious high cost alongside property is people. Yet service delivery in service companies requires, you guessed it, people. And people in offices.
The requirement for technical and administrative services can only fall so far if businesses are to survive so that demand for very basic business services, rather than for higher added value advice, has remained solid.
Maintained demand but slashed service delivery costs have meant a loss of redundancy in the system, errors, slower response times and client irritation at best and anger at worst.
In one case, after five years of perfect service, an IT-related supplier of ours had its first set of serious service problems earlier in the year and then faced a mega-weekend breakdown.
Our complaint was less the breakdown and more the complete failure of communications to us about it so that we still cannot say for certain whether the supplier fits the analysis that we have given above, but we would guess on circumstantial evidence that it was more than likely.
Those In Glass Houses Should Not Throw Stones
After a long period in which clients stayed loyal (for which we are exceedingly grateful) but did not increase budgets and where little new business appeared on the horizon, the last three weeks have seen a sudden and startling surge in both opportunities and new business wins.
A month ago we were, like everyone else, pleased with survival. Now, we are back to obsessing about ensuring service delivery to meet growth and to considering (admittedly not for a few months yet) new investment.
The problem is 'once bitten, twice shy'. How do you dare invest and take risks when two difficult facts are staring you in the face. And yet if you don't invest, you may well restrict your growth and become little more than a lifestyle business without the lifestyle - nothing but work and constant risk.
The first fact is the coming 'lending boom'. This is a national economic stimulus that is not matched by adequate stimulus elsehere. There are no signs that the G20 Summit did much more than offer us a long term regulatory regime of no help to immediate growth prospects.
The other fact is that the UK's national stimulus is filled with economic bear traps. The Institute of Fiscal Studies has come out with some horrendous figures for the annual level of tax rises/spending cuts necessary to balance the British books over the coming years.
It has estimated that extra spending cuts or tax rises of £40bn per annum would be required by 2015-2016 to bring borrowing under control and that the deficit would rise above 10% of national income in 2009/2010.
This means that business is going to face higher taxation without a crack at the tax avoidance schemes that made life bearable for some. It means that, eventually, inflation will be back on the agenda with supplier prices chasing prices charged to clients and customers.
For some businesses, the chance is offered of engagement with the delivery of public services on contract to save money but if the schools meals business is anything to go by, competitive tendering will make these fairly low margin opportunities that still do not deliver much for the public.
And an environment in which the necessity for higher taxation can only be offset by reduced public spending suggests a vicious political battleground that will be little more than a cover for naked class war, and for economic wars between regions and nations within the UK, for shares of the reduced cake.
The crisis is also now one of structural reform as much as it is one of recovery. The Government has been meeting with the Bank of England and the FSA to implement the G20 agreement.
Although largely targeted at the financial sector, it is hard not to see the 'burden' of regulation increasing rather than diminishing.
But one of the biggest problems is likely to be the massive national pensions deficit where employers are going to have to pay more into funds in good times to offset the need to provide lower payments during recessions.
The G20 Summit
The domestic coverage of the G20 Summit indicated how badly the media (and presumably the public) wanted it to be true that it had kick-started the global recovery. But the first signs of recovery based on 'quantitative easing' within the UK does not mean that export markets will recover quickly.
We and the IMF have our doubts (considerable doubts) about the Summit but the people wanted to believe. The G2O Summit ended with apparent unity and a smiling, even slightly embarrassing, group love-fest photo.
If the intention was to provide a de minimis communiqué that would bamboozle the world’s media into positive headlines in order to create confidence – it worked. Markets rose on the news worldwide.
However, if it was designed to deal with some of the fundamental problems in the global economy, then the best that could be said about it was that it created a framework to ensure that things did not get worse.
There was a serious disconnect between the front pages ‘spun’ by governmental press offices ‘on site’ and the opinion of informed commentators who drew attention to two fundamental flaws in the agreement.
First, most promises have to get through national parliaments and assemblies. This is far from assured.
And nothing was agreed to deal with what the IMF had identified as the fundamental problem in the system - the continued existence of a further estimated but unknown $1.3 trillion of toxicity in the US and Europe.
The considered and expert consensus was that, if you sweep away the hype, the G20 was a modest success in getting world leaders to talk to each other and buttress the IMF. It also represented a serious change of mood on the regulation of finance capitalism.
However, it was only the start of any global recovery programme. Few really believe that, at best and assuming no shocks, it will do much more than bring the global recovery forward by more than a matter of weeks. It will certainly not do much about immediate pain.
The market rise on the conclusion of the Summit was not so much on hopes of recovery but on a far more sensible hope of stabilisation. The problem started in the US and now needs resolution in the US. This fact has not changed. Toxicity is still locked into the US system and it still needs handling.
The Financial Times was helpful in summarizing what remains problematic from the perspective of an economic liberal.
- stimulus has to remain on the agenda if any recovery falters
- bank balance sheets remain unrepaired
- the Doha round is still in suspension and protectionist measures continue to creep in by the back door.
All this does not make the G20 Summit a ‘failure’ by any means but it is certainly not the success that the hype-merchants have tried to bamboozle the public into believing for domestic political reasons.
Where Does This Leave British Business?
Well, of course, the answer depends on type, size and location of business. This does not seem to be manufacturing's time in the sun after all. The overhang of sovereign crisis and the effect of toxicity on trade finance are seriously screwing up export trade.
But service businesses should be wary of moving forward too fast and too furiously. The new bank lending and the resilience of basic demand should enable most to survive if they have a decent business model and can ensure service delivery but there are a few traps yet in the wood.
We may see, within a year or so, a malign convergence of weak public spending, increased taxation, inflationary pressures, regulation trickling down from the reform of the financial sector and intense competition for a slightly smaller cake.
The sigh of relief that the tiger of collapse has walked away from the cave mouth may be replaced by the watchful fear that he may still be lurking in the undergrowth, waiting to pounce on a first misstep.
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01.04.09 - G20: The Aspiration for 'Unity'
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02.04.09 - The Ukraine in Crisis
03.04.09 - Assessing the G20 Summit
03.04.09 - US Foreign Policy At This Time
04.04.09 - Obama 'Wows' The Europeans
06.04.09 - The Three-Way Struggle for Power in West Asia
Domestic
01.04.09 - On The Eve: The G20 Protests
01.04.09 - Meanwhile, Back in British Politics …
05.04.09 - Britain After The G20 Summit