August 2001 - Small Business News

The first thing to understand is that we now have a 'dual economy'. This means that the industrial market (see below) can suffer from bleak times whilst at the same time the consumer market (see below) can be expanding - even booming. In the past, when industry suffered a down-turn in growth, consumers also suffered as past governments took steps to limit the effects of recession by direct and indirect tax's on the consumer: e.g. higher interest rates and higher goods/services/supplies taxation, control over personal earnings, and an infinite number of 'tweaks' to our overall taxation. Some economic analysts still back the 'single economy' theory: i.e. everything is related and that to control a slowdown in industry the consumer must be made to make concessions.

Consumer market

This means goods and services that you buy as an individual: all credit, loans, cars, houses, retail outlets and of course, pubs, Sky Sports and going to the dogs.

Industrial market

Manufacturers, engineering, steel, coal… (especially those dealing with exports as the strong pound means UK manufacturers give less goods per franc, mark, lira and euro than they did, say, last year - it's a great advantage on holiday but bad for UK business)

Inflation

To set the scene, consumer spending is growing faster than at any time in the past 18 months. Unemployment, by reaching record lows, also helps to fuel consumer spending through consistent and higher wage earnings. Mortgages are at their lowest rates for 40 years, however, for new buyers any slack you may expect to feel in your pocket is far outweighed by the ridiculous daily increase in almost all housing markets. Usually, when consumer spending gets to its current high level the bank base rate (see below) is increased so that the consumer has less money to spend on luxury goods as their mortgage, and sometimes loans, rise with the increase in interest rate. However, by increasing interest rates, business loans also increase and at times this increase is enough to push a business into insolvency!

Causes of inflation, examples

a) The housing market has always been a great indicator for inflation as when consumers have lots to spend home owners increase prices as it's a sellers market.

b) The same is true of, say; new car sales as there is little need to cut prices when the country is awash with cash. Car prices did come down for a while but the market place hardly needed a helping hand at this time.

c) Wage increase demands cause a business to increase prices with the net result that the consumer (the wage earner) has more money to spend, but the cost of goods (increased by the business to cover the wage rise) cancel each other out. But, those with no wage rise see a real hike in price, and it is also likely that the business is now more expensive than its competitors and is on that slippery road to oblivion!

What we do in good times

Effect on Consumer: lots of confidence to spend savings because that 'rainy day' looks a long way off.

Effect on Industry: industry makes and sells lots of goods for consumers to buy, and at a decent profit to the manufacturer as the manufacturer does not have to cut prices when everyone has money. Manufacturing staff get wage rises, overtime and job security (sounds like trouble again).

What we do in recession

Effect on Consumer: loss of confidence in their earning power, so decide to save money in building society and investments (e.g. ISA's).

Effect on Industry: industry cuts output, business owners stop wage rises and overtime and probably cuts staffing levels to meet the reduced output. In an attempt to capture some of the market for their goods, prices are cut which leads to smaller profits - in many cases goods are sold at a loss just to move warehouses full of stock. Those conditions can lead to a slowdown of production, redundancies and business failure.

Recession update

Most media commentators doubt that the UK will suffer the type of recession that most of us can remember in the early 80's and 90's, but that does not mean that things can go on as they are at present. Consumer borrowing must be slowed (probably by an increase in interest rate alone) and industry needs a number of government initiatives to compete with the best that the world has to offer… if only it was that simple!