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the abc of uvw

Over the last few weeks, the Chamber has seen more ‘hockey-stick’ shaped graphs than you can, well, shake a hockey stick at. Are these evidence of ‘green shoots’, and if so how robust is the recovery?

Some of the reports that will be referred to in this ‘viewpoint’ column are: the UK Economic Forecast (September 2009) from the British Chambers of Commerce (BCC); Economic Review - How will the recovery shape up? (Third Quarter 2009) from Deloitte’s; The UK Confidence Monitor Report (Q3 2009) from the Institute of Chartered Accountants (ICA) and the latest Bank of England (BoE) assessments.

What’s clear is that things have stopped getting worse; that there are still significant risks in the recovery phase; that confidence is starting to return to the markets; that we are all managing this downturn better than prior events; and that there will be a lot of pain still to come. Do these factors combine to indicate the green shoots of recovery?

Starting with the Deloitte’s report penned by Roger Bootle. They try to flush out an answer to this recession’s obsession with letters of the alphabet, and riff on the theme of the shape of the recession. The short-listed options of U, V, and W are considered, and . . . “Overall the shape of the recovery is best described as U-shaped … but whatever the letter, a return to normal, let alone strong conditions in the UK economy remains a long way off.”

The safest approach for all businesses to adopt is to plan for the worst and hope for the best, so the assumption of a U-shaped recovery is certainly one for the risk-averse – you won’t go wrong with your planning if this is your assumption. Of course, the biggest profits will be made by those who anticipate the recovery first – so spotting when and where the bottom of the U turns upward will exercise a lot of minds over the next few months. For the record, and consistent with a tendency to be contrarian, my hunch is that the downturn will be a V – but I wouldn’t bet your money on it.

David Kern, Chief Economist at the BCC, argues that the recession has proved to be deeper than anticipated, but reckons “that a UK recovery is set to start in the second half of 2009, with growth gradually strengthening in the next 2 years. But the risks of a relapse are high.”

He draws the same conclusion as others that the recovery will be fast, driven by the stock cycle, advantageous exchange rates and the government stimulus, but may then run out of puff. The rapid acceleration in unemployment is noted – averaging more than 70,000 per month over the last 6 months to September 2009, but he is shading down the total unemployed to just over 3 million – down from 3.2 million. The share markets have rallied since March, but a sustainable recovery cannot be guaranteed. The BCC remains concerned about the state of the public finances, and is urging all concerned that this should be dealth with – sooner rather than later.

Turning from the macro-economic evidence from the economists to the key points made by the BoE, they identify a number of salient factors. The overseas lenders who provided approximately 50% of the credit in the UK economy over the last decade have largely disappeared (literally in the case of some Icelandic banks); the equity market is starting to function again; exchange rates are still giving a 20% competitive advantage; growth of 1-2% will return in 2010, increasing to 2-3% in 2011. Tony Strachan, the agent for Scotland is confident that the worst is passed, that there will be rapid initial growth followed by a steady climb out of the doldrums. They have few worries that inflation will be a problem in the near future.

The ICA report for Scotland is in many respects the most interesting. As a survey of confidence amongst their members, (and we can reasonably assume that accountants are cautious folk) the results show a marked change with 13 of their 14 indicators turning up in the Q3 survey. The most interesting finding is that Scotland (+16) is looking more confident about the future than the rest of the UK (+5), and much better than London and the SE (0 to -1). SMEs are recovering confidence faster than large organizations, but there are some big challenges to recovery. The main issues for business were: Access to capital by 49%; late payment by 48%; the rise of bank charges by 37%; and most of all, low customer demand by 55%. The good news may be that customer demand should start to re-build now that the bottom has been reached.

You would have to be particularly cautious to avoid the conclusion that green shoots are starting to appear for the UK as a whole. This article was written in mid September, and by the time that you read it we may have more information. The robustness of the recovery in Aberdeen City and Shire will depend on the stability of the oil price and the consequent impacts on exploration and investment; access to working capital; continued progress in the diversification of the local economy and continued innovation. The main message seems to be: get used to current levels of business, they could last for a while.