Businesses must spend their way out of UK's latest recession

Having assessed the latest recession to hit the UK and the macroeconomic environment globally, CEOs are slashing budgets, halting Capex, and beginning layoffs, with BT and Royal Mail some of the high-profile names to start on this path. These corporate decisions combined with a government paralyzed of an economic vision, is exacerbating a situation where inflationary and interest rate pressures are crushing spending, investment, and increasing the cost of capital.

More broadly, industrial relations have soured to near breaking point as a decade of below inflation wage increases have forced workers to fight back as they are no longer willing, or able, to be paid less than is needed to live.

Simultaneously, issues of trust around previously encouraged home working has created corporate paranoia which combined with undercutting – firing staff before reemploying them on lower salaries and conditions – is creating anger and spreading discontent. Trade Unions for their part are connecting with the wider public - despite membership falling continuously since the 1970s - who understand their actions and relate to the cause, just as CEOs are portrayed as out of touch and have lost any control on a narrative of empathy.

Boardrooms cutting their cloth might feel it makes sense to reach for the recession strategy playbook of previous downturns, but the UK’s latest recession is a different animal from the past and therefore requires a different response - let me explain.

Firstly, the last two significant recessions in the UK, excluding the pandemic, originated from factors in the USA spilling over into Europe. This time around it has arisen due to a mixture of well documented supply side inflation (energy, food, and commodities), demand-side concerns about the Chinese economy, slowing global trade (according to the World Trade Organisation), and complex domestic factors that are only policy areas which business and the government can directly influence.

Those domestic factors are issues such as wages, household wealth, savings, debt, regional economic development, business economics, disposable incomes, interest rates, and wider monetary policy. Without venturing into the intricacies of each factor, the broader picture is that Britain has a two-speed economy constituting of those ‘left behind’ due to insufficient wages, rising levels of personal debt, and on the wrong side of the asset appreciation of recent decades. On the other side are wealthy households and businesses with increasing assets, access to cheaper finance, and the capability to absorb inflated costs and rising rates.

At a macro level the “mini budget” exposed the UK to the fiscal realities and challenges it faces, as well as exposing how governments of the past twelve years have not done enough to tax in the good times to give themselves options in downturns – that’s pre-pandemic fiscal policy. At the same time, public policy has continued to focus on taxing incomes directly entering the economy instead of wealth that sits above the real economy as shareholder equity, savings, and real assets. As a result, the room for economic stimulus is limited and the expansion of the money supply from the Bank of England during QE, Covid, and Y-o-Y treasury deficits proliferating in bonds means fiscal tightening is both unlikely to stop and a way of getting the pound (￡) to appreciate - bringing down the cost of importing expensive energy and food in the process.

For Rishi Sunak and Prime Minister-in-waiting Sir Keir Starmer, few policy levers exist without slashing spending somewhere else – not easy when every government department is in the midst of some form of deepening crisis, be it: health, transportation, treasury-backed investment funds, schools, policing, prisons, strike action, or childhood poverty.

With the ability to borrow on markets very publicly stress-tested, stimulus on anything other than real-asset infrastructure helping the UK economy to be more productive e.g., hospitals, cost effective (increase capacity), or provide clear multiplier effects, looks very tough when VAT receipts are expected to fall the prospect of higher taxes to just maintain what is already there. Add to the lack of stimulus options the absence of an export-led recovery, and it becomes clear that growth must be domestic as well as aided by FDI.

For boardrooms these conditions mean slashing labour costs to reduce operating expenses (OpEx) for a smaller economy is counter-intuitive because it will deepen the recession. And, just as companies start cutting marketing and promotional spends, they are forgetting the role that marketing plays in maintaining economic demand, as the legendary Philip Kotler observed.

Instead, companies need to shoulder the burden for getting the UK out of recession - having enjoyed the spoils of the post-Covid economic bounce - to create a business-led Keynesian recovery this time around. Businesses have enjoyed increasing profitability since the end of the of the pandemic according to the ONS[1] and, separately, IPPR analysis[2] . Moreover, the government has been a significant contributor of investment via gross fixed capital formation has been greater than business investment in 35 of 49 quarters since the 2010 General Election according to ONS statistics - thus the onus is on firms to reinvest profits, drawdown on capital reserves, and increase capital expenditure on everything from new vehicles, buildings and machinery (PPP), international M&A deals, product development, and training.

At a practical level rising wages is an important step too - Andrew Bailey is wrong for suggesting wages don't need to rise - and noting that energy costs, industrial metals, and some food staples e.g., wheat are beginning to fall back on international markets, inflation will start to recede, therefore CEOs can have confidence of falling costs coming through on imported inflation.

With productivity rates in the UK some of the lowest and labour markets tight in highly specialist and low-paid sectors, the need for greater capital expenditure on technology, machinery, and acquisitions abroad is more than warranted to maintain or, dare say it, increase profitability and internationalisation of the UK economy at a time when UK listed companies look increasingly ripe for aggressive foreign takeovers. To that end, Dyson, JCB, Pentland, and Swire Group, may offer some inspiration in terms of longer capital deployment and growth.

Ultimately, if boardrooms can take it upon themselves to keep unemployment low, investment high, and not expect the government to step in when in reality it is not in a position to do so, the UK will move out of recession much faster than is currently envisaged as, less we forget, the US economy has been running as hot, the Eurozone for the most part lacks economic confidence – especially in Germany and Italy where it really matters - and China’s economic issues and growing unemployment are giving off all the hallmarks of a deep recession. All said the UK needs to find its own path out will business taking a leading role – not slashing everything would be a good place to start.

[1] https://www.unitetheunion.org/news-events/news/2022/june/new-unite-investigation-exposes-how-corporate-profiteering-is-driving-inflation-not-workers-wages/

[2] https://www.ippr.org/research/publications/prices-and-profits-after-the-pandemic