City Insider: Double dip? No, just a long, painful slog

City Insider - A City perspective on the travel industry from FT journalist David Stevenson

Even if we do double-dip, it’s unlikely to happen soon – so keep your eyes on the hard road to recovery, says David Stevenson

At the moment it seems that every business manager, entrepreneur and investor I meet only wants to talk about one thing – are we about to double dip?

The media are obsessed, and even consumers seem to be increasingly worried about another bout of job losses and cutbacks. Wading into this debate is a bit like wading through treacle: every side loves to throw graphs and statistics at you.

One week it’s American unemployment telling us that consumer spending is static, the next week we hear that the Germans are doing fine and that corporate profits have never been so good.
To understand what this means for your business I suggest focusing on two iron laws of economics. The first is that in the short term national and regional differences do matter.

The emerging markets, for instance, are still expanding fast and have moved well beyond the initial restocking phase of recovery – China’s challenge is not to boost growth but slow it down.

Even within developed world economies there’s a large dispersion of outcomes, with the German market especially strong at the moment. That should be great news for the likes of Tui and Thomas Cook.
Equally, don’t be blind to regional changes – I suspect the independent principality of London and its suburbs will be displaying much stronger growth than the rest of the UK.

I’d add one cavaet to this, which is that we are all absolutely interconnected over the medium to long term. If the USA really is in deep trouble, we in the developed world have a big, big problem over the next one to five years and no amount of national differentiation or local fiscal pump-priming will get us out of the mess. But we’re not, yet, at death’s door.
The other iron law is that of trends and lags. Many businesspeople see the ebb and flow of economies as a binary matter – either we’re booming or in a terrible funk. Luckily economies aren’t like that up close. They trend up and down around long term averages, moving in a flow that is sometimes difficult to spot.

Trends can grind to a halt in a matter of months but that’s actually fairly rare. What’s more common is that recoveries display a series of stages, with a rapid first phase, followed by a slowing down, followed either by a gentle resumption of growth or an even more pronounced slowing down which in turn prompts a panic which pushes the economy over the edge.
Remember that real world economies are affected by changes in sentiment and emotion, and that it takes a long time for a consensus view to emerge. Back in the summer of 2007 plenty of analysts were warning of banking trouble, but it took nearly a year for the penny to drop, prompting the final panic.

Even if smart people are predicting a bad double dip now, it may not actually happen until much later in 2011. Economies are all about these trends and lags, and most statistical analysis only currently supports the conclusion that we’re in a slowdown phase of growth.
But rather than take my word for it, I suggest that readers investigate the analysis of Andrew Smithers, one of the City’s best kept secrets. He’s a widely respected economist and analyst whose macro-economic and investment research – produced by Smithers and Co – is a must-read for most cynical types.

Andrew was for many years deeply sceptical about the debt-fuelled bonanza that pushed house prices higher and inflated all manner of bubbles. When it comes to investing Andrew is also fairly contrarian and has never quite reconciled himself to stockmarket manias which see company price-to-earnings ratios shoot up into the mid teens.
Here’s his view of where we are, one which I have to say I agree with. Smithers and Co think businesses need to reckon with the following likely outcomes:

 > “Deflation or very low inflation is a necessary condition for the economic recovery of G5 countries”
 > “G5 exchange rates must become more competitive”
 > “Developing economies are likely to grow well and have high marginal demand for food and raw materials” (i.e commodity prices will remain resilient and high)
 > “Falling service prices will enable inflation to remain low in G5 countries despite rising import prices”
 > “A narrowing of profit margins in services, where investment is relatively low compared with manufacturing … Such an adjustment is probably essential to allow falling profits to be compatible with economic recovery”
Smither’s view is essentially one of a benign recovery. Slow, painful, but not a double dip. Crucially sterling will continue to be weak, with price inflation low, and the service sector looks like it will bear the brunt of the pain – profit margins will continue to fall as commodity prices rise.

I’d suggest this makes slightly grim reading for many in the travel sector as profit margins tumble back again  and sterling remains volatile and weak. Oil prices will stay high and operators will be unable to pass on much of the pain via price rises.

For me this suggests that the next 12 to 18 months will be touch-and-go when it comes to consumer confidence here in the UK. Most of the upturn will have to be led by the manufacturing sector and service exports – again not necessarily good news for travel sector.

Don’t bet on a double dip quite yet. This hangover after the debt-fuelled party of the last two decades is going to take many, weary years to shake off…

This website uses cookies to ensure you get the best experience. Learn more