The Economic Outlook 2010

Can We Expect Recovery in 2010?

Whilst statisticians debate the detail of their own figures, we need to work out what to expect in 2010 in the UK. As we see it, there could be four very different outcomes.

Four Different Scenarios for the UK

1. Recovery - the UK will recover much of the ground lost in 2008/9
2. Flat – the current situation will not alter substantially over the next year
3. W – the ‘V’ becomes ‘double dip’, i.e. the country will slip back into recession
4. Depression – the second phase of recession turns nastier still

September 2008 to Now

Prior to 2008, the flourishing finance sector had compensated for the loss of traditional core activities in the UK, such as manufacturing, fishing or coal mining, and the need to become a net importer of energy.

More recently, short-term expansion of the public sector minimised the impact on rising unemployment levels.

The collapse of Lehman Bros in September 2008, and the subsequent fall in the credit supply acted as catalyst for the downturn in which the global economy shrunk by over 2%, despite strong growth in the emerging nations like China and India.

Like the entire western world, the UK private sector is now suffering high unemployment and frightening debt levels. Public debt has doubled in the last three years to unsustainable levels. The UK Government has tried hard to create economic recovery, by reducing interest rates, introducing temporary measures such as car scrappage and VAT rates, as well as supporting the ailing banking sector and QE (quantitave easing – printing money). The pound has fallen by some 30% against the euro since the crisis began. The Government cannot afford such schemes much longer.

Like the Government, UK business leaders have had to focus on short-term survival tactics throughout 2009. Many optimists are pinning their hopes for 2010 on a genuine economic recovery, which will enable a return to ‘normal’ trading. The pessimists are not so sure!

So what are the options and expectations now?

Economic Options and Expectations for 2010

Whatever the results of the next Election, the UK Government will face a dilemma. If we simply cut back our expenditure, the reduced investment could trigger ‘double-dip’ recession, or worse. We cannot continue to live beyond our means for much longer though. Another dilemma will be sorting out the troubled banking sector, whilst keeping good levels of credit open for companies and individuals.

One recent book by Josh Kosman entitled ‘The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis’ suggests it is already too late. Pessimists believe another credit crunch is inevitable, leading to the collapse of half of all private equity-owned companies in the UK and USA over the next five years. Certainly it is true that many of the fundamental problems that caused this recession are still with us.

In the USA, the dramatic rise in public expenditure in Obama’s first year must be reversed or financed by higher taxes. In the UK, Darling has already indicated the need to curtail spending significantly. The only area likely to remain sacrosanct is the NHS. Any UK Chancellor is expected to raise taxes and reduce the public deficit. Already many employees in the public sector are experiencing for the first-time that the cheque-book is now ‘locked’.

Some experts say that UK PLC is like a failing company, lacking pro-active leaders who can develop strategies to gain control of events and establish profitability. In general there is a lack of confidence in the economic outlook:

• UK unemployment is around 2.5 million and rising. Forecasters have revised their expectations of 2010 unemployment figures in the UK to around 2.8 million. Unemployment rates in the U.S. and the Eurozone topped 10% at the end of 2009, casting doubt on the sustainability of the recovery.
• Manufacturing and construction sectors have been hardest hit, while many public sector areas remain relatively unscathed.
• Wage increases for those in work are at a record low of 1.1% p.a. Most private sector payrolls are struggling, with many workers on shorter hours for less pay, whilst others are working extra hours without pay.
• The falling pound has made exports a little easier. However, surveys show that UK directors hope and expect some slight recovery in 2010, but they are less optimistic than their European counterparts.
• Consumer confidence on both sides of the Atlantic is too low to drive a meaningful recovery over the coming months.
• Ageing power stations will lead to rising energy bills over the coming years, particularly electricity. Gas prices are likely to be steadied by the availability of liquid natural gas.
• The increases in VAT, NI and hidden employment costs will create further distress. The British Chambers of Commerce say that the 18 employment and tax regulations due by 2014 will cost British business more than £25bn over the next four years.
• The Bank of England has pledged to keep interest rates low in 2010. This policy is likely to be reflected across the U.S. and Europe.
• Many would like to see the UK Government follow Barack Obama’s policy of encouraging the banking sector to avoid high-risk trading and focus on increasing business lending instead.
• Rising unemployment will prevent a repeat of surging house prices, which had advanced way beyond inflation. Property forecasts vary from up 10% to down 10% for 2010. Based on historic averages or rental values, Britain’s property prices are still overvalued.
• The global economy is changing, as many small emerging economies have stronger fiscal balance sheets than Britain.

When Can We Expect A Recovery?

There will be no quick panacea. Considerable damage has already occurred and quick recovery is not realistic. The World Bank believes that any recovery will be so small in 2010, that the world will stay in recession.

Real recovery needs to be export-led or UK consumer-led. Consumers cannot sustain the required credit levels to create anything substantial. The UK problems in core sectors like manufacturing and construction coupled with slow world economic recovery suggest that exports will not just happen, despite the falling pound.

The financial balancing act could go wrong. Some say the combination of high asset prices, low interest rates and large fiscal deficits cannot go on much longer. Lord Mandelson admits the UK faces rapid economic decline if the Government does not cut its spending. Mervyn King suggests Britain’s economic health is critical and depends on whether we can cut the public deficit quickly and effectively.

The UK Government needs to lead by example and reduce public expenditure without damaging the infrastructure or triggering further Recession or Depression. This will not be easy for politicians in an Election Year!

Learning to Work Smarter

Certainly the UK Government needs to be very smart in the months to come, as did the Japanese when recovering from recession. It would help if the public sector was encouraged to change the habits of a lifetime and learn to focus on value-adding activities like productivity and cost control.

Equally individual company directors need to be smart enough to focus back on long-term strategic advantageas well as keep ensuring short-term survival tactics are working.

Smarter working means using business streamlining techniques to develop and exploit competitive strengths and working to eliminate company ‘fat’, without damaging the muscle.

For instance, we should invest more in science and technology, or ‘Innovation’. If we are to survive, we must all learn to work smarter.