Mixed messages from different economic commentators mean that you need to be planning for both a relatively solid recovery in the second half of the year and a long run recession ending perhaps in 2010.
The latest forecasts
Judging by the performance of the FTSE-100 this week, the markets are currently pricing in the rather more doomish forecasts.
According to a recent podcast issued by ratings agency Standard & Poors (S&P), the US economy is still going downhill, with GDP growth probably contracting four percent in the third quarter.
They have a deep recession scenario that includes sustained high unemployment, high oil prices (around $120 a barrel) and a global downturn resulting in a seven percent contraction in the US economy from mid-2010. Ouch.
The stimulus package now appears to have been too weak, and green shoots of recovery are fading fast. (Not that the UK can crow: we now look set for a second round of quantitative easing.)
The International Monetary Fund’s economic forecast agrees with much of S&P’s more gloomy outlook. On the upside, it says the UK economy is expected to grow in 2010. And next year should be much better for many developing economies, as well as China and India.
What if the outlook for 2010 improves further? The IMF’s latest forecast is for higher growth than it predicted in April, and there are still plenty of positive indicators knocking around.
Even the downbeat S&P economists have an optimistic scenario where the US recession is over already (although GDP for the 2009 as whole would still contract).
How to plan for both extremes
- Stay flexible on wages. Even if things start to improve, there are risks that a fragile recovery could stutter again before a solid upswing kicks in. The one benefit of the last few months of rising unemployment is that there are agency staff available and the job market favours hiring on employer’s terms. How about variable pay structures the keep fixed costs to a minimum?
- Look to new markets. China and India are well-recognised for opportunities, but also consider the more stable countries in Africa. The Chinese certainly are, and even the Russians are investing in natural resources businesses there. The IMF numbers show many emerging economies doing really quite well over the next couple of years — so it’s worth being exposed to them.
- Invest in technology. Smart IT spending should result in better productivity, enhanced flexibility, greater visibility into your own operations and new marketing opportunities. Caveat: dumb IT spending can cripple the business. New approaches — such as “software as a service” — have really bedded in now, offering companies greater computing power at lower cost and with fewer hassles.
- Watch the cash. If business stays in the doldrums, reducing working capital is a must-have survival strategy. If business picks up, there’s always a risk of over-trading and running out of cash to pay the essentials like wages, rents and taxes. Either way, a switched-on finance director or financial controller is your best friend right now.
