How is the economy really doing?


The news has been exceptionally gloomy over the summer, with dire predictions for how bad this winter will be. The news has been more pessimistic than in November 2020, when we were hurtling towards another lockdown and the vaccines hadn’t even been announced yet. In light of this we wanted to take a look at what was actually happening in the economy today to see if this down beat tune is justified. Given the pace of the news right now, some of these indicators may change quickly.

The most pressing issue facing businesses and households has been price inflation, and specifically energy price increases. No one would dispute that the summer saw worrying increases in natural gas prices coupled with news that both France and Germany were unprepared and unable to ramp up energy production over the short term.

EU Dutch Natural Gas prices 1 Year (EUR):

However, there is some good news on this front, Germany has managed to fill its reserves faster than expected and as a result natural gas prices have rolled over, and governments around the world have started to step in to manage the crisis. Of course, prices are not going back down to where they were 2 years ago, but these interventions this will provide some relief to stretched households and businesses. What hasn’t been in the news is how far oil prices have dropped back from their peak. Brent crude oil has dropped from US$123 to US$92 since March this year. Other international commodity prices also have fallen from their peaks by over 40% including, wheat, iron ore, timber and copper. While US inflation seems to have slowed and is showing early signs of reversing.

Turning to the domestic economy, Lloyds most recent Business Barometer shows that business confidence is waning, but hasn’t hit anywhere near the lows 2020. While this isn’t a forward-looking indicator, it should be noted that business confidence is still higher than it was for most of 2019. Lloyds said that 43% of business were expecting stronger trading conditions, down 10 percentage points from July, while 17% were expecting worse trading conditions, up 1 percentage point from July. Meaning the decrease in confidence is not an increase pessimism, but rather simply a decrease in optimism to a more neutral outlook.

Business confidence:

The Purchasing Managers Index (PMI) show that where there is a gloomy outlook, it is not evenly distributed across the economy. The manufacturing sector has fared much worse than the services sector. The services sector is still currently expanding (above 50 = expanding, below 50 = contracting).  

Manufacturing PMI:

Services PMI:

Consumer confidence is one place where this pessimism is unmistakable. It is lower than it has been in the past 25 years, including during the GFC. Though interestingly, this hasn’t shown up yet in consumer spending, which, while still below it’s peak in 2019, has not fallen off a cliff like in 2020, or even 2008.

Consumer confidence 1997-2022:

Consumer spending 1997-2022 (GBP millions):

The last indicator we have looked at is the exchange rate. The pound has slid heavily in the past 18 months against the US dollar. In the news, there has been coverage of the euro going below parity with the US dollar. Both of these currencies slides can be explained by the same factors: 1) the stronger US economic recovery following COVID-19, 2) the Federal Reserve hiking interest rates and strengthening the dollar, and 3) the US’ energy independence. In terms of what this means for the pound and euro going forward, we can probably expect to see the euro slip significantly below parity, and the pound reach a long way towards parity. The US economy will likely continue to outgrow the UK and Eurozone, given that there won’t be energy shortages in the US this winter, while there is a not insignificant chance of this happening in Europe. The Fed has also signalled it will continue to raise interest rates, furthering strengthening the dollar.

GBP/USD Aug 2018 – Aug 2022:

It is hard to say what the outcome of this will be, on one hand it means imports, and particularly energy, will get more expensive and force the Bank of England to raise interest rates. It could also mean that British exports look more attractive, bolstering the manufacturing sector.

Having had a look at all these economic indicators, shows a complex picture that defies the media’s simplistic view of negativity. There are certainly reasons to be concerned, if energy prices reverse their current drops, consumer confidence will fall further and businesses, who are more exposed to market volatility as they are not covered by the energy price cap, will feel a significant squeeze. However, among the business community there appears to be a resilience in the face of these pressures and a desire to push on regardless. The significant price drop in core commodities suggest that supply chain issues are being resolved and obtaining inputs will be easier than it has been in the past 12 months. It also suggests inflation is nearing its peak.

What does this mean for your business?

There is no doubt we are in difficult and uncertain economic times, however the impact will not be equal across all businesses. Some businesses will be hit harder than others by cost, supply or demand shocks, while others will be presented with opportunities that might not be available in normal times. Regardless of the impact on your businesses, this is not a time to sit back and to wait for the government to provide guidance or support. The important thing to do is to get in front of this by actively managing the situation and opportunities. There are many business levers that can be pulled, but a good place to start is across 5 key areas.

Managing costs

  • Getting a good hold of your cost base is key. Managing costs requires a really good understanding of the business costs, the drivers of these costs and how they impact the business and customer. Getting a clear view of spending, distinguish between strategic and non-strategic spending, and reducing/managing costs where possible.

Managing cash flow

  • After many years of benign economic conditions many businesses have experienced little in the way of bad debts or late payment. This is likely to change and change rapidly as companies of all sized see cashflows impacted.
    • Understand your debtors and their risk profile
    • Ensure payments terms are in place and are enforced.
    • Where possible manage working capital cycles to ensure they are appropriate to your needs. For example; if a business receives payment 90 days after sale, but pays its suppliers in 45 days, this will put a significant strain on cash flow.
    • Using appropriate credit approaches for new clients
    • Review opportunities to insure the debtor book
  • Manage cashflows. No matter how weak or strong you cashflow it is always good practice to run a 6 or 8 week cashflow forecast which will quickly highlight any cash shortfalls or other cashflow issues such as debtor receipts not arriving as expected.

Pricing policy

  • During periods of high inflation, constantly reviewing pricing policy. Striking the right balance between ensuring sufficient demand with the management of margins can often be the difference between business success and failure during period of high inflation and economic stress. This requires proactive management of
    • Customer relationships
    • Supply chains
    • Sales data and information

Business Growth

When the news cycle is full of negative economic news it can be very difficult to think about growth, but tough economic times can present interesting opportunities for companies that are aware of and seeking growth.

  • Customers and distribution partners may be seeking new more reliable suppliers.
  • Competitors may be exiting the market creating opportunities to acquire new customers or growth through acquisition at more affordable costs.
  • New markets may open-up for existing products and services as governments and companies pivot investment to new opportunities and areas.

Customer experience

  • Last but not least, your customers will be key to your success
    • Makes sure your business is properly connected, communicating and understands your customers
    • Maximise sales and cross selling opportunities
    • Focus on customer loyalty

Sales  and sales channels

  • Is your sales approach fit for purpose? When markets are good, sales are flowing, and commissions are earned it can often mask inadequate sales approaches and inefficiencies. Now is a good time to make sure the CRM system is up to date, that sales management processes are robust, that there is good visibility of the pipeline, customer activity and sales trends.

In summary, focus on your customer, how you connect and sell to those customers, your costs and your cashflows. Get really good and focussed on these elements and your business will then be set to take advantage of the growth opportunities as they arise.

About Where Now Consulting Ltd: Where Now Consulting is a management consulting company that focuses on helping its clients to grow and compete. The company offers a range of consulting services, including business turnaround and performance improvement, formulating market entry strategies, mergers and acquisitions, joint ventures and alliances, and sales and distribution strategy and management.

Sources:

Lloyds: https://www.lloydsbank.com/business/resource-centre/insight/business-barometer.html

Trading Economics: https://tradingeconomics.com/

Photo by Tobias Aeppli: https://www.pexels.com/photo/person-holding-compass-in-forest-1125272/