How to Thrive as the Economy Falters – An Interview Interviewer: Toby Thompson Interviewee: Professor Joe Nellis September, 2008 TB: Professor Joe Nellis, you have written a piece for the Institute of Chartered Accountants in England and Wales called How to Thrive as the Economy Falters, interestingly. The UK has experienced sixty consecutive quarters of growth and now things are going wrong. What is the problem – why is it going wrong?
JN: Well, there are a number of factors that have caused this quite sharp reduction or slowdown in growth and we may be heading for a recession, of course, at the moment we have got zero growth and may be heading for a recession in the next one or two quarters. Yes, you are right, we have had sixty quarters at least of positive growth – unprecedented in the western world. The longest period in history – in our modern history. If we are going to attribute causes to this there are really perhaps two aspects to look at: there is the domestic factors and the international economy. Let me start with domestic factors. The consumer is king in every country, no less so in the UK and the consumer is clearly feeling less confident about the future. So spending by you and I is slowing down. The reasons for that are to do with, well, they have got a lot of debt outstanding and if you remember we had a rise in interest rates over the last year or so and they have peaked at around about five per cent, but still people have to service that debt when they are less certain about their jobs, about their bonuses, about their house values and that is a critical driver of consumer confidence. At the same time the Government is also feeling the squeeze in this country – they have got a large debt as well. The Government borrowing has gone up in recent years, the national debt has increased and as we head towards the next election the Government will come under pressure to control that spending at a time when the economy is slowing down. That is a difficult balancing act to perform. Of course, then there is the international factors and in recent weeks, months, we have seen the so called ‘credit crunch’ really come home to roost across the whole world, but in particular the western economies. The credit crunch is essentially a reluctance on the part of banks to lend to each other, which obviously has a knock on effect to the rest of the world – and you and me as well, in terms of mortgage etc. And the reasons for that are not so different from the cause of the slowdown in the UK. The US consumer is the biggest borrower in the world and they have been encouraged to borrow more and more, and of course as the economy slows down there, so they cannot afford to repay either. But perhaps what we should focus on is not so much the US consumer, but what is called global imbalances. We have a situation where America in totality has borrowed so much money from the rest of the world that when America sneezes, the rest of the world is catching a cold and this global imbalance is not new – it has been building up for years and we are now beginning to see, I think, the fallout from that. TB So, which sectors in particular are going to be worst hit in your view? JN Well, there are some obvious ones we are seeing already. The housing market in the UK is being hit and will continue to be hit for some time. We have not seen the end of the scare, or the squeeze, on house prices. And housing is the biggest item that you or I will ever buy, so when the value of that falls it has a knock on effect. So, if people are buying fewer houses, or moving less than they did before then of course they are not replacing furniture, carpets, fixtures and fittings and so consumer durables in general are going to feel the effects of this downturn. And of course, the so‐called big ticket items – the other big ticket items, and in particular cars. People are reluctant to borrow, they may not be able to borrow and they are reluctant to spend – they are trying to pay back debt, or at least not increase their debt. So cars are going to be affected, the car industry. Other sectors, the travel industry, again a big ticket item – the annual family holiday overseas and there are other concerns with that sector, but the spending will slow down and people will perhaps stay at home more than others. And the other sector which is really critical for the UK economy is the so called SME sector – the small and medium sized enterprises – because to a large extent they rely on bank funds, loans in other words and if banks are more risk averse then there is a shortage of liquidity going into those SMEs, they will have difficulty in maintaining their businesses and many of those, I think, will go to the wall. So we are facing a difficult period ahead of us. TB So who is going to thrive? JN I think there are three or four key sectors that will do very well, despite the downturn. Let me start first of all with exporters. In the last year or so the value of sterling has come down significantly – it has weakened against the major currencies such as the euro. So our exporters are going to find it easier to sell into foreign markets and so Europe is a good market for us. Of course, the reverse is also true, importers are going to find it more expensive, but again, the good news is for exporters. Other sectors that will do well? Well there are always winners in a downturn and financial advisers are going to find themselves quite busy, I would suspect, in recent months trying to help people in terms of their investment decisions and trying minimise the risk that they face. Of course, in an international context we are facing a crisis concerning energy in general. The sheer scale of demand for energy has driven up, as we know, oil prices which have come down a bit as well and the price of all commodities. So anyone in the energy and commodities industries in the long term will continue to do well – and of course, they are doing very well even in the short term. TB So, Joe, if there were some rules for survival in this difficult economic period, what would they be for consumers and for organisations? JN For consumers it is quite clear – do not increase your debt levels any further, look for ways of economising, for reducing discretionary expenditure and reduce overall debt and as we come out of this downturn then you will in a much better position in the future. For companies, it is not so clear cut, there will be companies that are and will face hard times, that is clear. Let me be more positive, however. I think there are a number of important points that companies should recognise to take advantage of the current situation. First of all, motivate your staff – let’s be optimistic, let’s not talk up the market, but make sure you don’t damage morale by being negative. I think negotiate hard on terms with suppliers, with all suppliers, be they domestic or international. That doesn’t mean you will always get the best deal, but this is the time to really negotiate hard. In terms of performance management, now is the time to think of bonuses. You know, it is easy to give bonuses in good times, but it’s really good if you can pay bonuses in the bad times because people are doing well. I would also get ready to invest. There are going to be lots of companies out there who are going to be undervalued and if you have got spare funds, if your balance sheet is in good shape, there will be good opportunity to pick up some very lucrative businesses for the future. So, I think, for some companies, as I said, there are hard times, but for many others who have got the vision and the resources, I think there are good times ahead as well. TB Joe Nellis, thank you very much.