The Phony Recession: Are We About To Enter A Real Recession?

By September 4, 2012Thoughts

I’ve been thinking for a while now that things are happening around me that are giving me the sense that things aren’t quite what they are with the economy. These are my thoughts about the state of the economy and how this has been affecting me as a search marketing professional offering seo consultant services predominantly in the UK. It’s not just me either, I’ve been talking to a lot of business owners who offer business services to other business and they are all saying the same thing – that belts are being discreetly tightened.

I think I see it most in the Ink website we operate, people are seriously cutting down the amount of ink they are buying at the moment which is possibly part of a change in culture but also – I’m certain there’s an element of the state of the economy playing into things here.

We’ve all been told the recession is just about over, I’m suggesting that we’ve only really experienced a phony recession and due to the below we are about to be hit by the real long tail effects of the last few years in the form of a protracted recessionary period.

Ever since the start of the financial crisis the UK’s economy has been behaving a bit strange (to say the least) and when thinking back to my economics lessons in the past it doesn’t really make much sense. We’re seeing a combined effect of strong employment whilst seeing subdued output – quite the opposite of what you’d expect to see in a recessionary period, but there are a number of other things that make this recession odd one of those being the proportionately low number of businesses going out of business.

For me this means one thing only, that an increasing proportion of the working population are working in low-productivity types of businesses. According to Jon Moulton, head of private equity company Better Capital, believes that low interest rates and forbearance from the banks meant that “zombie” organisations continue to keep going even though they aren’t producing a great deal of economic output.

Interestingly, the share value of a number of insolvency organisations has greater reduced from their height in 2008 which reflected the anticipated boom in insolvencies that didn’t really happen (insolvency rate is running at around 0.9 whereas it was 1.6 in the 1990 recession). The companies that have had to have already cut back as much as they can to keep them going, of course this is something that still be around the corner, after all we are running at about 4% below pre-crisis level. If we accept that the double dip recession that we’ve been through to date has only been a phony recession – it’s likely that the worst is yet to come. I think there are some hurdles that we’ll have to overcome before we get to that point.

The low interest rates have therefore allowed the bad loans to continue due to forbearance and not become losses on their balance sheets – thinking about it, if they weren’t by and large state owned banks there may have been a little less of this happening and the recession may not have gone on so long, but probably would have been a lot more severe – Ben Broadbent (a member of the Bank of England’s Monetary Policy Committee) called the banking system “sclerotic” by damaging productivity as well as the flow of recourses, personally I think it’s all part of the over-borrowing on houses and everyone sitting pretty waiting for the house prices to come back to pre-crisis levels before they sell and move to a bigger (or smaller property).

The other thing that needs to be taken to account in all this is productivity has decreased to around 0.5% even though employment rose 0.7% in the second quarter

All very strange, there’s the chance there was that much money sloshing about in the pre-crisis economy that businesses are able to keep going and making do, and individuals are able to spend some of their reserves and some people will be surviving by spending the considerable redundancy payouts they’ve had whilst surviving on the income of part time jobs.

The above coupled with the general feeling of just how hard it’s been over the last couple of months is making me think that what we’ve been through to date has been a kind of phony recession and we’re going to hit a really hard recession as the deep pockets lined with the pounds earned, borrowed and saved throughout the pre-crisis years start to run out.

The ultimate question has to be what happens next – do we have a sharp shocking recession that clears some of the deadwood or are we facing something in the ilk of that that Japan saw late-80s that lasted for about a decade? Either way I fear this is only get worse before it gets better – those that aren’t putting their marketing in order now are really going to suffer from not having adequately built up their brand when they had the opportunity.

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