Green shoots in the economy?

Is the end of the recession in sight? Are we seeing the beginnings of economic recovery? Although few are expecting an immediate upturn, economists have detected some hopeful signs that things are stabilising and confidence is returning. With this in mind, and in the wake of last week's budget, leaders must surely be wondering if they are seeing 'green shoots' across their own industries and what, if any, response this requires. Clearly, businesses should be ready to act on and take opportunities if recovery is in sight, but when and in what form is still uncertain.

Government measures, such as increasing capital allowances and the new strategic investment fund in last week's budget, will hopefully provide some help for companies in this difficult environment. According to Steve Cooper, Managing Director for Barclays Local Business, banks are already seeing higher levels of activity and confidence from the business community. He says: "Whilst the economy continues to contract overall, there are some encouraging signs that the pace is slowing. Bank lending to the business community is increasing and with measures announced in the budget I would expect this to increase further. More help is needed on the issue of late trade payments, but in general, SMEs are taking the necessary but difficult decision to preserve profitability and generate cash. Although we may not be able to achieve the forecast rate of growth in 2010, confidence is returning with many businesses reporting better prospects and improving order books. Indeed, in March 2009, over 40 per cent of our Local Business customers had sales higher than the previous year."

This said, recovery will differ from sector to sector. Those with the opportunity to invest in this market should consider cyclical stocks if, as research from organisations like Ernst & Young and the CBI suggests, we are seeing signs of recovery next spring. Don Elgie, CEO of marketing services group, Creston, explains: "There is a commonly held view that so-called cyclical stocks are first into a downturn and first out. This may go some way to explaining why the marketing services sector and media stocks have shown a strong recovery since the begining of March. Most of our client budgets are calendar, so we have a clear visibility for 2009. Following a strong 'pre-close' trading statement on 20 April, our new business wins in March 2009 are nearly twice the level achieved in March 2008. We believe this will give us strong momentum as we enter the new year."  

Other industries are not seeing such positive signs of recovery. Graham Love, CEO for QinetiQ has yet to see improvements in the market. "I have seen no 'green shoots' and suspect it will be some time before we do," he says. "There is very little in the budget which is likely to be effective in remedying the situation in the short-term and some things, such as 'taxing the rich', which is likely to be detrimental. It would have been nice to see more encouragement for research and development. We need to start investing much more heavily in technology and innovation in the UK if we are to remain competitive in the world and the government could do more to help."

Like industries, regions are impacted in different ways. Paul Danos, Dean of the Tuck School of Business at Dartmouth explains: "It seems that the crisis is affecting countries in different ways according to their dependence on exports to the US and Europe, commodities in general and the extent of damage there has been in banking. China seems to be able to stimulate internal consumption to offset its flagging exports to some extent. Certain Latin American countries that are highly dependent on exporting commodities are hurting and, of course, the plunge in oil prices has done real damage to the economies of Russia and other less diversified economies."   

Clearly all eyes will be on America's economy as the key indicator for economic growth and recovery. Serial NED and former adviser to two US Presidents Mary Jo Jacobi sees some positive signs. "There are some green shoots sprouting in both the US and the UK, but it's hard to tell yet if they're blossoms or weeds. The economic data is uneven, with stock markets retreating from their recent rally, sales of existing US homes also retreating and unemployment, a lagging indicator, showing no signs of slowing. I would look for continued contraction this year and modest recovery in 2010. Ironically, and with apologies to the former President, I wouldn't rule out a 'W' shaped recovery, where the US economy dips again into recession after a thin, weak improvement dragging the UK with it.

"My two biggest concerns are the Fed's ability to fine-tune when recovery begins and the possible chilling effects on economic activity from proposed tax increases on businesses and entrepreneurs in both countries which create uncertainty and could cause capital flight," continues Mary Jo. Indeed, few business leaders are attributing their survival in what continues to be a tough market to the Government. As Don Elgie says, "We do seem to be making our luck at present and judging by many of our competitors' performances, we are not alone."

American recovery will depend on stabilising the banking system according to Paul Danos. He says: "There seems to be some signs of stabilisation but several large bank groups including Citi and Bank of America continue to worry analysts. The business sectors outside of banking will not fully resume normal investments and expansion of employment until they are assured of stable financing for their activities. This holds true for most of Europe and the UK as well. It seems that banks want to reduce their leverage by hoarding cash at the same time that businesses need assurance that banks will resume normal lending. We are in a bit of a spiral and the government is trying to break it. I believe that there will be success in these endeavours and businesses will resume their normal investment and employment within the next two years."

Green shoots in the economy? Insights

For more information on the topics raised in today's newsletter, see the ITEM Club - Spring 2008 and Accenture's Strategies for the Downturn with a section on repositioning strategies as well as innovation and growth.

Matthew Blagg, CEO, Criticaleye