Don’t bank on fast growth in a slow recovery

The cranes have stopped, so why do many businesses think the recession doesn't apply to them?

THE past fortnight has seen the economy and any analysis of its fortunes enter a new and uncertain phase. The sharpest of falls appear to be behind us, with the slowdown itself now slowing down.

This is some way from saying the boom times are on their way back. Widespread redundancies took place well into the early 1990s, even at a time when recession was fast becoming distant memory. Instead, we find ourselves in limbo, hanging out for the latest figures for the day, hopes raised or dashed accordingly.

There was, for example, much optimism last week when Anthony Bolton, president of investments at Fidelity International and this country’s outstanding fund manager of the last decade, remarked: “All the things are in place for the bear market to have ended.”

Hardly 24 hours had passed when the high expectations that Bolton brought turned to dust. A survey of the UK’s independent financial advisers found them far less convinced by a FTSE 100 index that has climbed around 1,000 points since its lowest point in March. A convincing three quarters of IFAs put the equities surge down to nothing more than a bear market rally. Some 71% said the strong performance was down to the switch into equities from other asset classes. Almost 40% said a bull run would not begin for another year. Some said 18 months. Only a quarter believed the UK would recover this year.

Much of the recovery in the markets, which posted their biggest monthly gains in six years in March, up some 8.1%, ironically came from increases in banking stocks. It may not last. On Monday, speculation that the UK’s recession would deepen increased as Sterling breached the 90 pence per euro level again and the FTSE 350 Banks Index recorded the worst falls in two weeks.

However, on the same day, the Organisation for Economic Development and Co-operation published its index of leading indicators, which suggested that the UK, China, France and Italy were in the “recovery” stage of a business cycle – “being beyond the inflection point”, as Jean-Claude Trichet, president of the European Central Bank, put it – although he was anxious to point out that they faced a slower pace of decline rather than a return to growth. Previous OECD reports have predicted an end to recession in the UK and France by August, just three months away.

But the Bank of England is likely this week to contradict Alistair Darling’s widely-derided growth forecasts made during the Budget, when he predicted the economy will shrink by 3.5% this year but return to growth thereafter. Following on from a report from the influential Commons Treasury select committee of MPs, which labelled the Chancellor’s figures “an optimistic assumption”, Bank governor Mervyn King is expected to adjust forecasts to take account of increased contraction in the economy for the first quarter of 2009, of 1.9%. The Bank had expected 1.4%.

While a survey of City analysts by Idea-global.com found some 80% expected a downward revision of growth prospect, there was some speculation that they could also marked up, to take account of more optimistic surveys. These include a slowing of house prices falls, from -5% last year to around -3% for the first three months of 2009, along with a rise in people’s expectations, both for the UK economy and for their own finances, and news from the US of an annual rise of 2.2% in personal spending.

At the same time, Siemens Financial Services’ research on credit availability among 1,500 firms in Britain, France and Germany found that firms here were the gloomiest, with 68% of companies believed there would be further credit caps this year, while 74% expected a rise in the cost of credit. A second survey, from the Chartered Institute of Personnel and Development and KPMG, found businesses downbeat over prospects for the job market.

And so on it goes. Such a time of uncertainty behoves businesses to look neither left nor right but straight ahead. This is quite different from carrying on as before. While it remains exceedingly difficult to discern the true state of the UK’s economy, and while some businesses are laying off staff or going to the wall, others appear not to have made the correlation between the slowdown and their growth plans.

Talk of aggressive expansion persists, and while it and the boundless confidence that usually accompanies such assertions are often signs of exaggeration that, if not accepted, are at least forgiven, many of these businesses appear to be progressing only with Plan A. It is as though having a fallback position is some kind of admission of failure.

It smacks of macho culture, but that hardly seems a point of importance. Instead, business leaders can save themselves potentially a great deal of heartache if they begin pegging their chances of growth to the fortunes of the economy.

Of course, there will be businesses that will put on fast growth at this time – associated technology companies, of the kind that innovate on the back of modern developments such as Twitter, or develop applications for the iPhone, for example. And there will always be professions that do well out of a downturn, such as bailiffs. But for many businesses it is time to get real and understand their limitations at this time, adjust targets and leave the grand ambitions for better times.