Economic outlook March 2022
Bob Bradley – A personal view on the economic outlook written March 2022
As always bear in mind these are personal thoughts from a relatively well informed observer. I do not have a crystal ball and may be entirely wrong. My thoughts are with the sole intention of provoking your own thought process. You are at complete liberty to agree or disagree. It is your thoughts that drive your actions and your actions and judgements that will determine your results.
In my last update, I said “I think 2022 is going to be a tricky and stressful year for all of us business leaders”.
My economic update this time is simple: As I said in January but double down!
With very fast 6.5% pa GDP growth we did get the economy back to pre-pandemic levels. But hidden in the headline is that public sector spend was up 10% and private sector down 3%.
Supply chains are indeed easing, although it is also worth understanding that the primary cause of the shortages is the accelerated change in the nature of our economy. We are manufacturing more semiconductors than ever. The shortage is because during the crisis our spend switched significantly from services to products and many of those products include lots of semiconductors.
And that’s the big message of this update. We are not returning to the old normal. Things are different in many many ways: practically, emotionally and politically. Sadly the situation in the Ukraine will amplify that further.
As I said last time there are a lot of risks. There will be good news, bad news and a lot of change. That change will create opportunities for the smart entrepreneurial and agile business. Those who by luck or judgement get themselves in the right place at the right time… and pain for those that don’t realise that the world has changed and don’t recognise the risks as they emerge.
I talked last time about the risks of inflation and my view the Bank of England are underestimating the challenge. That sadly was reinforced this month by listening to their briefings and noting the governor’s comments about the need for people to resist asking for pay rises. It felt a bit like shouting in the wind when forecasting inflation by April, when we know the energy price cap is going up by 54% in that month. Not forgetting that National Insurance is going up by 2.5 percentage points… or about 10%. And many other cost increases too.
Where I, in my ignorance and arrogance, think the bank has it wrong is that they argue all these rises are one-offs and because we use annual measures will ‘fall out of the figures’ in 12 months time and so we will return to their target inflation rate of 2% by Dec 2023.
Where I, in my ignorance and arrogance, think the bank has it wrong is that they argue all these rises are one-offs and because we use annual measures will ‘fall out of the figures’ in 12 months time and so we will return to their target inflation rate of 2% by Dec 2023.
What they seem to miss is illustrated by the governor’s comments. I am seeing and hearing of people changing behaviour in a way that won’t drop out of the figures so quickly. People are not stupid. Costs going up for individuals combined with a shortage of staff for employers will, I believe, mean pay inflation. Whilst ‘we’ve’ saved a lot over the pandemic, ‘we’ are now using those savings to cope with inflation. (I put ‘we’ in quotes as these are macro figures across the whole economy. I suspect that there is a wide range within those overall figures. I guess that the well paid professional, who continued earning whilst spending less has saved an awful lot whilst the self employee/low paid basic labour provider who couldn’t work has more debt than ever.)
In my view, pay rise expectations will not then be a one off. It will continue as long as there are staff shortages. People look for annual (at least) pay rises. If you consider that 70% of the UK economy is services, increases in pay will inevitably lead to price increases and continued inflation.
That is a worrying situation, particularly as the message I’ve picked up from Bank of England statements is that “whilst our best guess is that inflation will come back under control with a few gentle interest rate rises up to 1.5%, we take our 2% target seriously and won’t hesitate to act more strongly if we need to”.
So there is a definite potential for rapidly rising interest rates at a time when other costs are rising and there is global instability. That could make the climate very tough in late 2022 and early 2023. Don’t forget that business insolvencies usually happen after a recession, as the economy recovers. This could make my comments below about winners and losers underrated.
What does that mean for business? Here’s my tips.
Beware margin erosion. Look carefully at pricing and explore where you can grow revenues by enhancing the value of your product or service, or even by charging properly for something you used to give away. Ensure that long term arrangements include the ability to increase charges with inflation.
Look carefully at costs. Do you spend money on anything that the market doesn’t value and isn’t essential?
Recognise that staff will, in general, cost more. Look carefully at how to increase productivity. Invest in automation, physical but also software and AI. The RoI increases as staff costs increase. The same applies to investing in (appropriate) training to enable your team to add more value more productively.
Check carefully the value of each role to the business and be discriminating. Respond to the pressure and pay well those roles and people that efficiently add value to the business, and fund that by being tough in cutting back in areas that are not so added value. (The idea of giving an equal inflation adjustment is for me an abdication. Management means being able to have honest conversations and helping people work out how they can add more value to the organisation – and then they can be paid more.)
And finally a severe warning! As I’ve said before, change causes winners and losers. Businesses in a down sector go bust as do badly run businesses. Shareholders lose money and staff are made redundant. Meanwhile businesses in an up sector do well and recruit, possibly after reskilling, the good staff. I’m arguing there is a lot of change and so there will be a lot of that sort of thing happening. Strategy, being in the right place at the right time, is more critical than ever.
To be clear: yes, I am repeating what I said before. I believe that everything I said last time remains valid. The difference this time is the added steroids. I think the changes are going to be more dramatic because of the Ukraine situation and also because I think the Bank of England is underestimating the way pay rise expectations in a time of inflation with staff shortages will persist.
Finally, for our overseas members, my usual apology. My comments are UK centric because sadly that is most of what I experience and most of our members, from whom I gain the insights are UK based. Having said that I have also looked at the global position and believe my comments are, with a few exceptions valid globally. I guess because the economy is pretty global now, albeit currently with a little de-globalisation happening.
Inflation is rising rapidly in the US and EU too, the economies there are also picking up rapidly and there are staff and semiconductors shortages there as well. The only key difference I detect is that the ECB is likely to be slower to raise interest rates than the UK or US.
Written by Bob Bradley, founder of MD2MD.