In any business plan there should be discussion of the wider environmental changes that could affect your business. Today we discuss the Global Financial Crisis, how it might affect you in 2010 and why you should be wary of anyone who says it’s over.
The crisis if you believe some commentators, has passed it’s worst. The UK is officially out of recession, so we hear. House prices are on the increase and there’s some good news from the mortgage market.
So was that it? Have we escaped the after effects of apparently the greatest piece of financial mismanagement the world has ever seen relatively unscathed? If you believe that dear reader then you’re probably still waiting for Santa Claus to squeeze down your chimney! Or you’ve got your head in a bucket of sand.
The Story in 2009
At the 2009 VPMA congress last year Dennis Turner, chief economist from HSBC bank delivered an uplifting and statistically pleasing overview of the economic situation. His prediction was that by the end of 2009 or start of 2010 things would start to improve. We all felt relieved.
So Far So Good?
Great, well here we are, officially the green shoots of recovery have punched through and all is looking rosy. Time to sit back safely knowing we rode out the worst of the crisis. But hold on, wasn’t it all just a bit easy?
Sure, some folks lost their jobs and repos on mortgages are up, but compared to what we were expecting from the “worst financial crisis in modern times”, (given what history tells us about the great depression) it wasn’t all that bad.
I mean no vets that I am aware of went bust (but then I don’t know what financial shape the recent acquisitions of CVS UK Ltd were in either). And I doubt if many of us have seen a significant decline in our standard of living?
What’s bothering me is that something just isn’t right with this picture. The facts before us don’t add up with what the economists predicted. Doesn’t it all just seem a little too easy? (I’m not being flippant here. I’m sure many practices have had a tough year).
Perhaps I’m just being pessimistic and am now guilty of doing what I was blasting others for 12 months ago – talking down the economy. The thing that has changed is that we are now in the midst of a full recession. It’s real and as far as I can see, nobody has done anything that would fundamentally improve things. In fact it might be the case that Messers Brown and Darling have done just the opposite.
A Layman’s View
I like things simple, so this is my possibly over simplified view issue.
Imagine you are mired in personal debt. The type of debt you just can’t ever hope to pay your way out of. You have an interest only mortgage worth five times the multiple of your earnings. Your house has lost value and you now owe more than your property is worth. Your credit cards are max-ed out and you’re running an overdraft. Things look pretty bad. Your outgoings outweigh your income by so much that you are unable to even service the interest payments on your debt.
There are few ways out of this situation:
1. You somehow fluke a miraculous increase in your earnings to be able to service your debt again. (Win lottery or become a drug dealer – both extremely unlikely).
2. You take your medicine for some bad decisions and declare yourself bankrupt. You lose everything and start the painful process of rebuilding from the ground up. But with a defunct credit rating you’re going to have to do this the old fashioned way. Pay for goods and services with money you’ve actually earned and saved for over the hard years that followed your glut of debt driven excess. (This option doesn’t win you votes or friends)
3. You borrow more in the vain attempt to service your existing debt, with even more debt – on ever worsening terms. In effect putting the pain off for another day, but allowing the size of the problem to get even bigger in the meantime. The higher you fly, the harder you’re ultimately going to fall.
In the global economy right now guess which is happening? Bingo, Number 3.
Central banks/governments around the planet have lowered interest rates to rock bottom so they can service national debts without putting up taxes and completely kill off their economies (and chances of gaining or retaining power).
In the UK things are even worse because our public debt has expanded from 49% of GDP to 60.2% of GDP* in the past 12 months!
The low interest rates also mean that people (that’s you and me) can service their own debts and keep spending money we don’t really have (hence propping up the frail old economy with yet more fake spending).
In Australia, where officially we didn’t even have a recession, the government even gave everyone AUS$900 to spend. That was nice of them. Lots of easy liquidity, sloshing around making everyone feel great. It’s as if we’re all addicted to the drug called credit and can’t stop spending what we don’t actually have.
And for the past year (in accordance with what Mr Turner rather chillingly called the “nuclear option”), since dropping interest rates and bailing out the banks didn’t work, the government has pulled it’s one and only remaining lever to try and get us all through this before the elections – they are printing money like there is no tomorrow. Flooding money markets with phoney money to keep the whole house of cards propped up.
It just doesn’t add up. The credit bubble we’re trapped in is huge, almost too huge to believe and sooner or later is got to pop. The party has to end, and the mother of all hangovers will be hot on its heels.
The economic hangover we have suffered thus far really doesn’t match the size of party we’ve all had for the ten years prior.
Three Party Poopers for 2010
In spite of these unresolved ‘issues’, commentators are beginning to talk up the economy. The stock market has rebounded strongly, sterling’s slip seems to have stabilised and house prices have even risen in the last couple of months.
For this lay observer things aren’t over yet though. And these are three of the things that I’m concerned about.
1. People who have jobs are going to see a reduction in the value of their money.
One result of all this “new” money being printed is that the value of our currency is being eroded. That is, each pound is worth a little less than it was before.
Our earnings have shrunk as a nation (recession), but there’s more actual money swilling about in the system.
And when inflation gets going (oil prices, food prices, etc) we’ll see these effects exacerbated in higher prices for everyday things. Without the attendant wage increases to compensate (who’s giving out pay rises right now?), confidence will take a hit. People will have less money and spending on luxury items – including pets – will be at risk.
2. Lots of people are hanging on to their homes by their fingertips. Low UK interest rates are keeping debt payment artificially low. This is allowing millions of UK borrowers the opportunity to stay afloat. It won’t last forever. When the government removes it’s support for banks later this year and/or inflation begins to creep into the system interest rates will climb. Defaults on mortgages will rise and things could get messy. Again less money for spending.
3. Unemployment is still rising. We’re almost up to 2.5 million or 7.9% of the workforce and although for now that figure is seemingly slowing down, it won’t take much for it to start climbing faster again.
Am I wrong? I’d love to be. Things are very, very finely balanced. Anecdotally, for now at least, people seem happier to give up a holiday abroad or a nice meal out, rather than not have their pet treated. But if things get really nasty can we rely upon that forever? I doubt it. Look for rising numbers of pets in shelters.
The next 12 months will be amongst the most interesting and potentially exciting in recent history. How our profession fares will come down a lot to how we manage our businesses. We cannot control the wider environment but we can position our businesses to weather the storm.
Dave’s Resolutions for the New Year
• Run a tight ship – control your costs and capture your missing charges
• Be the best at something – what makes you different?
• Communicate why you’re the best – make the money you spend on marketing really count.
• Look for opportunities – as always there will be winners and losers. If you’re looking to get bigger then my guess is that there will be bargains to be had in the next 12 months.
• Don’t believe the hype – use your head! This is election year, politicians on all sides will tell us anything.
At the risk of sounding like Ricky Fulton’s glum character The Rev. I.M. Jolly, Happy New Year and good luck in 2010.
In the past year the UK has seen unemployment rise and wages fall. What this means for your practice is that clients may not be in as strong a position to pay or they may not be in as much of a hurry to pay.
