Economic update 16th June 2022

Bob’s thoughts on the economy

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.

You’ll never have had it so good bad (if you’re under 60)

(Estimated reading time 6 mins)

In less than twenty years we have faced four major challenges to our economy and our day to day lives. Whilst the preceding twenty years included some major events, I don’t remember any hitting our daily lives as seriously.

I sometimes think it’s my memory fading. Things in the past lose impact. But then I challenge myself. Sadly, I am old enough to remember the seventies and I remember the three day week, regular power cuts, overflowing bins in the streets… and riots.

So I do think we are facing unprecedented and worrying times. We never really recovered from the financial crisis before we were hit by Brexit and before we even began to get that done, Covid and now war in Europe.

I’m naturally optimistic – like most business leaders. I remain of the view I expressed in November 2021. “I’m optimistic for the medium-term but it’s going to be rough first”. The difference is that each time I write my update I envisage it being even rougher.

In my article in September last year I suggested inflation was going to be a problem. In January I said “I think 2022 is going to be a tricky and stressful year for all of us business leaders with good news, bad news and a lot of change” and in March I said “as I said in January but double down”. Sadly this time I feel we have to double down again.

“2022 and 2023 are definitely going to be very tricky and stressful years for all of us business leaders. There will be some good news for some, a lot of bad news for many and certainly a lot of change. I remain optimistic for the five year horizon providing the government doesn’t mess it up by focusing on short term popularity.”

In the following series of articles I’ll try to summarise the situation, where I think we might be heading and what you, as business leaders, need to do about it.

In summary

For those of you impatient and without the time to read the detail, the headlines of my thoughts are:

We will face a recession.
– I think possibly as soon as quarter 2. (i.e. We may already be in the beginning of a recession). That recession will continue for a while – and get worse.

Alongside the recession we will face high and persistent inflation.
– The Bank of England (in my not so humble opinion) has consistently failed to recognise the scale of the inflation challenges. It has added to the problem through continuing QE too long and then begun to react too little too late.
– Oh and by the way they are the Emperor with no clothes. They haven’t recognised the market power employees now have and that their single weapon interest rates is impotent in the face of a global price rises in energy, commodities and soon food.

Painful stagflation is likely.
– Inflation with a recession and rising unemployment is called Stagflation. An economic predicament seen as the worst possible situation for an economy.
– We have inflation, a recession is likely and I can’t see inflation going away until unemployment begins to bite and mitigate the pressure for pay rises.
– So I think we face the worst real economic outlook we have faced since the 1970s and it will be difficult and painful to get past the challenges that will create.
The consequence of the above is I believe a difficult period for society.
– The impact of the economic situation will be very difficult and will not impact evenly or fairly.

I’m optimistic in the medium term.
– The economy is much more dynamic and entrepreneurial than it was in the 1970s. Assuming we don’t stymie the ability of business to respond to the myriad of challenges we face I am optimistic that things will be in a better place by 2025. The result of a process economists call Creative Destruction. Also assuming the Ukraine crisis doesn’t lead to a full blown world war of course.

I will pick up each of the above in separate but related articles. Bear in mind that although I’ve tried to write them all as standalone, they interact so to get the full picture you need to read all the articles. They are available on the following links:

Recession and growth (or lack of it) (Estimated reading time 2 mins)

Inflation, the Bank of England and Interest rates (Estimated reading time 5 mins)

Employment and where has everyone gone (Estimated reading time 4 mins)

Shortages. Consumer/Business confidence. (Estimated reading time 5 mins)

Social divide (Estimated reading time 6 mins)

Government debt, policy and creative destruction (Estimated reading time 2 mins)

Action recommendations

As always my focus is asking what does this all mean for the business leader? So here are a few tips:

Try to make your business resilient. Keep a cash buffer. Now is not the time to ‘go for it’ and take a flyer. Review your cost base. Make sure you really need all your costs. If revenues turn down can you weather the storm?

Ensure you have good credit checks on your customers. The next two years will be problematic with losers and winners as the economy adjusts to a lot of disruption. Remember a bad debt turns a sale into a complete loss. You’ll wish you hadn’t won the sale.

Keep a close watch on your margins – gross and net. Chances are your supply costs will be increasing, your overheads will be increasing and your staff costs too. Unless you increase sales or put up your prices you’ll be losing margin. Remember if your gross margin is 40%, 10% inflation on your costs knocks your profits by 25%. And if your net profit is less than 10% of revenues you’ll be in an overall loss. Why not try pushing the boundaries of price on a few of your less critical products and see what happens? When supply is short you may be able to get a big margin improvement. And sometimes a price becomes a signal of quality. One consumer facing member found that for some products higher prices led to increased sales.

Focus on markets directly or indirectly serving the wealthier segments. As explained in my article on  Social divide, the gap between them and the less well off has increased and will continue to increase.

Look for sideways opportunities. Disruption is good for the smart entrepreneurial business. You’re probably closer to the customer than the big company managers so you’ll spot what’s happening more quickly than them. And as the lean machine you are, use that early insight to move quickly. If you have the wherewithal, look for opportunities to consolidate the market. i.e. Acquire competitors. Buy from the administrator. That’s  Creative destruction in action. Make it work for you.

Focus, focus, focus. In a tough market more than ever it’s important to focus on being very special. Delivering a very special set of products in a very special way to a very special set of customers. Don’t dilute your focus trying to sell too many things to too many people. So often the 80:20 rule applies. As we grow, over the years we introduce new products and services and our range widens and widens and our business gets more and more complex. Now is the time to look carefully at where you make your profit and consider whether you might need to narrow your focus and just sell and do what you are really, really good at.