Bumps In The Road

We are 5 months into a 24-month recession.

How are you finding it so far?

Whilst the most challenging part is to come in 2023, there is room for optimism.

Let me give you some context.

Whilst this is expected to be the longest recession on record it's also going to be one of the shallowest.

The Bank of England say the recession will last around 24 months.

The Office of Budgetary Responsibility say it will last around 15 months.

They are both in agreement that we are in recession.

They also agree that 2023 will be the most challenging.

The Bank of England expect us to remain in recession throughout 2023 and the first half of 2024.

In 2023 GDP is expected to have fallen 1.9% and 0.1% in 2024. Modest by many recession standards.

GDP is expected to recover gradually thereafter with 2025 showing around 0.7% growth.

The differing view of the length of recession and the speed of recovery into 2024 will depend upon inflation and the size of the interest base rate required to manage inflation.

Inflation hit 11.1% for October which is expected to be the peak. It would have been closer to 14% has we not seen the energy measures.

As a reminder The Bank of England forecasts inflation to be:

??2023 Q4 5.2%

??2024 Q4 1.4%

??2025 Q4 0%

Inflation is largely driven by external factors from the invasion of Ukraine along with a hangover from Covid and potentially some Brexit impacts (specifically the strong labour market). Energy prices and food prices are starting to slow which are the main drivers of inflation.

Wage growth is typically lower than inflation, so not a specific driver of inflation but a driver of recession.

Why are we in recession

Pay has not risen at the same rate as inflation, which has created the cost-of-living crisis. Consumer confidence and spending is falling so to business confidence and investment.

Unlike other recessions which tended to be relatively short, inflation needs to cool which takes time which will then lift spending and create economic growth.

Interest rates are expected to peak at just over 4% (from 3% currently) but that assumes 4% is enough to cool inflation (alongside the other external factors slowing price growth).

Even if inflation returns to the 2% target, that’s price growth slowing rather than prices falling back. Although some costs like commodities and sea freight have fallen back, average prices will remain at a new normal rather than us seeing price deflation (which is bad news for an economy too).

The table below gives an excellent example of how the cost-of-living crisis is starting to bite as households cut back on spending because of increased prices and affordability concerns.

Non-food stores sales volumes fall by 0.6% over the month and 2.7% below their pre-Covid February 2020 levels.

Household goods stores (such as furniture stores) sales volumes fell by 1.5% in September 2022.

Pay Growth

According to the Office for National Statistics real terms total pay fell by 2.6% over the year.

Growth in regular pay (excluding bonuses) was 5.7% in the year to July to September 2022.

?After taking inflation into account, regular pay fell by 2.7%.

Rising energy and food costs have more bearing on the inflation rate experienced by low-income households, as a greater proportion of their expenditure is spent on these areas compared to high-income households.

How to respond?

The ONS say that food and drink service firms most likely to consider cutting multiple trading days to reduce energy costs which is reflected in the table below.

Every business must make its own decisions about what is the right response.

History shows that a focus solely on cost cutting sees a business approach every decision through a cost reducing lens, rather than learning to operate more efficiently.

Businesses should instead focus upon on driving operational efficiency.

Costs stay low when demand returns, allowing profits to grow faster than those of competitors.

Businesses that reduced their costs early on in a recession, and cut the right costs, were those that posted rapid growth following.

Is it all bad?

No, for 2 good reasons.

1)?????There are countless stories of businesses using the last recession to reorganise their business to drive profitability and efficiency. Businesses that fared well changed their operations dramatically to come out on top of the recession. Seen through the right lens a recession is an opportunity.

2)?????The table below shows UK quarterly economic growth from 1955. The most striking thing here is there are far more periods of economic growth than there is recession. The challenge for businesses is navigating recession for 18 months to take advantage of the growth that follows.

Achieving operational efficiency

Taking action to navigate the “bump in the road” of recession is a key theme of this article as is?driving operational efficiency?to take advantage of your competitors reacting too slowly.

At this point you might be thinking you have nowhere left to look for savings or you don’t have the internal resources to maximise efficiency?in the time required.

That’s where my team and I might be able to help.

Expense Reduction Analysts (ERA) are procurement and cost reduction experts, we work with small companies right through to instantly recognisable brands like BT, DFS and Ikea.

What makes us special, is our cost specialists all devoted to their specific area of expertise which means they can use their knowledge and buying power to rapidly?introduce you to new?insights,?suppliers,?and?processes?to?improve your business and reduce your costs.

Unlike other consultancies if we don’t deliver direct savings, there is no charge.

If you would like to learn more about what the benefits out clients see, please email me at jrimmer@expensereduction.com