Doom and Bloom

  • Yesterday, we were at an economic briefing given by Tom Vosa, Head of Market Economics UK at National Australia Bank. His commentary was both enlightening and thought provoking.

    Just in case anybody is in any doubt, those of us in the UK, Europe and the US are heading for a full-on technical recession. According to Tom, the underlying growth of the Chinese, Russian and Indian economies means that the global economy is still in reasonably good shape, but there is little dispute that we must become accustomed to a trading environment that many of us will not have experienced in business before.

    Next year is likely to be rough. Tom forecasts negative growth in the first two quarters before the first signs of recovery in the second half of the year. Year on year growth of 0.6%; a 4% fall in consumer spending; a $/£ exchange rate of 1.60; a 30% fall in house prices and oil bottoming at $80 a barrel are all on the menu for us to digest.

    Real consumer spending power has already fallen by 1% due to the increase in fuel and energy prices and is set to fall by a further 3% next year in direct correlation with the fall in house prices. The retail, leisure and tourism industries will undoubtedly be worse hit by us feeling that we have less disposable income.

    For those of us living and running businesses in the South East there are some glimmers of hope. Good levels of equity exist in house prices and the labour market is strong. The wave of job losses is expected to be largely absorbed by the migrant worker population and businesses on the whole are in a good cash position. We can also rely on government spending, particularly on infrastructure, to underpin the economy.

    Tom described now as 'the end of the beginning' of the credit crunch and expects the MPC to bring the base rate steadily down to 4% by February next year. The frustration for most of us is that, while interest rates on deposits will be reduced immediately, borrowing costs are likely to remain unchanged as the banks seek to increase their lending margins to recover their losses.

    So what exactly can we do about it? After all, we are individually powerless to influence the actions of the banks and not many of us have the option of switching our business to the Middle & Far Eastern markets.

    There is a lot of debate at the moment about whether consumers will return en-mass to the large and trusted brands. After all, brands like Northern Rock and XL set out to kick sand in the face of the dominant players, but it is ultimately the established brands that have endured.

    Our view is that it will be the businesses with reliable brand promises that will survive and ultimately benefit, regardless of their size. In times of uncertainty, consumers seek the reassurance of brands they can trust and a small business has more opportunity to present its trust credentials than a large business. The failure of Lehman's and XL graphically illustrates that we have no idea what is going on behind the scenes in large corporations.

    Trust can be a more powerful motivator than price, even in a recession. Zoom and XL have proved a painful sojourn for those seeking a bargain.

    Trust is gained by acting and delivering with integrity. Businesses that focus their marketing efforts on demonstrating transparency and giving outstanding customer service will win trust and maximise new and repeat business. Get closer to your best customers; make sure you have terms of business in place, have the courage to say 'no' to customers that abuse your trust in them and maintain your marketing effort to maximise brand recognition and affinity and you will be doing all you can. Nothing is guaranteed, but this seems to us the best way to bloom in the gloom.

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