The Economy 2011

When Can We Expect Recovery?

Judging by the poor quality of the March 2011 Budget, economic recovery will take a long time. We need positive thinking to stop our economy stagnating and slipping back into recession.

The Budget demonstrated lame thinking. It addressed many minor issues, but regrettably, without clear demonstration of economic leadership or business acumen to take the country forward.

The Deficit Gets Worse

Over recent years, the population has grown in numbers and average age significantly. We now require to produce much more with much less, in a highly competitive world. Late last century, we saw the decline of older wealth-creating industries such as textile manufacturing, chemicals, engineering, car production, coal mining and fishing.Manufacturing provided 32% of our national output in 1970 and has fallen to around 12% now. Recent attempts to stimulate the manufacturing sector have not borne fruit, and the decline continues.

In the last two decades, this devastation was masked by the success of service industries, such as banking and finance, as well as a flourishing technology base. However, the recent recession has destroyed confidence and reduced much of the activity in key areas like finance. Individuals, companies and governments are all re-appraising the future with nervousness.

The Treasury keeps re-appraising the likely financial deficit. Like any business, forecasting requires knowing the likely income, which depends on our ‘growth’, as well as sound estimates of our expenditure. Latest figures suggest we keep over-estimating our ‘growth’, as the deficit gets worse.

Critical Economic Problems in the UK

The recent budget did little to address critical economic problems facing business and individuals in the UK, such as:

The UK has the largest budget deficit of the G7, some 10% of GDP. The Treasury appears reactive, not proactive, having lost control.
The soaring cost of food, clothes and fuel, plus rising VAT and employment costs are killing hopes of recovery.
Key business sectors are struggling: manufacturing, engineering, chemicals, construction, retail, travel and finance sectors are all straining.
Innovation and risk-taking have suffered as they rely on considerable finance sector support. In recent years, we have also built mountains of bureaucracy, which are real barriers to innovation. Recent measures to counter the barriers need extending further.
As prices rise dramatically, consumer earnings have fallen sharply and confidence is now too low to drive a meaningful recovery in the next few years.
High unemployment creates long-term negative cultures amongst the workforce.
Property values will not recover until 2015, as rising unemployment will prevent any repeat of another surge.
The ageing population threatens pension and healthcare costs rising beyond affordable levels in all G7 countries, as well as shrinking the working proportion of our nation.
Ageing power stations ensure rising electricity bills over the coming years. Gas prices are likely to be steadied by the availability of liquid natural gas.
The rising cost of fuel is not attributable to Libya alone. BP was once Britain’s biggest company but is now struggling, with massive implications for the UK economy.

Economic Recovery: Two Schools of Thought

Financial recovery normally requires some combination of boosting income whilst reducing expenditure. The Cameron Government has promised a mixture of growth and spending cuts to get out us out of the recession. Obama has suggested he is aiming to create the platform for growth in the USA.

One school of thought firmly believes that attempts to stimulate the economy and create growth will not bear the promised fruit and they believe that cost reduction is the most effective answer. The other school believes that cutting expenditure levels will have knock-on effects that will damage the economy further and the only way to fund a growing, ageing population is to create real economic growth.

Obama seems to be moving the US Economy forwards, unlike Cameron in the UK.

Is Streamlining the Answer?

One major disappointment in the Budget announcements is that no measures to review the inefficiencies within each public sector body have been announced.

Public sector reforms in the pipeline involve considerable privatisation and are unlikely to yield savings in the next ten years. It is more likely that the costs to consumers of key services will soar, just as in further education.

Many private sector companies have taken a hard look at themselves and streamlined day-to-day operations.

There are many opportunities to automate administrative functions, reduce paperwork and streamline decision-making in the public sector. Such streamlining could save many vital public services, as the danger is that wholesale cuts will be implemented, and do more damage, unless some sense prevails.

Cost Control

Cost control is essential for the survival of individuals, companies and nations. Sometimes cutting budget deficits to reduce expenditure levels can help to boost growth, but more often spending cuts may be combined with tax increases and the result can be even lower growth.

At the national level, many pro-austerity economists are aware of the real difficulties of stimulating growth and believe it will be beyond the politicians, saying the politicians have no choice but to cut costs.

Unfortunately, politics often gets in the way of economic sense. Proposing wholesale redundancies in the private or public sector often rebounds. Careful thought and planning is required to find the optimum answers, especially at a time when the population profile demands more and more money to be spent on areas such as pensions and healthcare.

The austerity believers are hoping that much of the pain caused by severe cuts can be offset by QE (quantitative easing or printing money), but this will take inflation levels above target.

Many analysts believe that supply-side structural reform to boost productivity will help the prospects of growth more than the cutbacks.

Real economic recovery is years away. At every level we have to work smarter and we have to work quickly.

Work Smarter, Streamline Your Business

If we do not learn to work smarter, we will be putting our country and our companies at risk. The downturn is a perfect opportunity to implement reforms. Company directors need to focus on long-term strategic advantage, as well as ensuring short-term survival tactics are working.

Smarter working techniques include business streamlining to develop and exploit competitive strengths and working to eliminate company ‘fat’. It also means investing more in science and technology, or ‘innovation’, to automate and transform traditional processes.

If you need to work smarter, we would love to help.

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