Show me Numbers

Stephen Waddington MD of the newly born (from the merger of Loewy’s PR firms) Speed Communications, posted yesterday about the recession and as he so clearly put it “bollocks to denial and despair”. I started writing a comment and then realised it was getting rather lengthy, so hence this post. I strongly advise you to read it first. 

Firstly, and very importantly, I would strongly suspect that everyone so far in this conversation sympathises greatly with those who are suffering the “human” cost of the recession pointed out by Linda in the comments. 

I also I agree with the point raised by Stephen Davies – we have got fat. The West has consumed and consumed, fed through a diet of credit financed by the East to feed its own desire for economic growth and facilitated by bankers’ personal greed. My personal favourite observation of this is the massive growth in storage centres. We have all bought so much “stuff” that we have to hire somewhere to store it! We are therefore going to have to have some degree of “pain” while we lose the weight. 

It seems to me the key point of the post though is not whether the recession is causing/will cause suffering – unfortunately that is a given – but whether an attitude of despair or denial is likely to improve the situation? 

In this regard I find myself agreeing with the quote that Bill highlights “we can have a depression if we really want one”. The problem is we haven’t had a recession with 24/7/365, always on, accessible from everywhere, fighting tooth and nail for attention, media coverage. The internet was literally in its infancy and mobile telephony and 100+ channel broadcasting were not widespread in 1990-92 so it was arguably easier to try and remain positive. In the face of such relentless negativity it is easy to see how people despair. 

What we need is leadership. Leadership of the kind Barack Obama showed in his Inaugural address – things will be tough, hard work will be needed, but if we believe in ourselves we can achieve great things. For me the key distinction highlighted in the piece Linda links to is action. Making decisions, taking opportunities, changing, responding, not just accepting. This is what leadership is all about. We might make mistakes, but at least we tried to ride the wave of change, not let it wash over us. 

Unfortunately Mr Obama is a bit of a one off. However in our own industry it seems to me that posts like these from Stephen are trying to show leadership by asking us all to focus on the positive. As an accountant, and therefore a bit of an outsider, I am inclined to think that the PR industry, as communications experts, has an opportunity to lead the way in trying to get a more positive conversation started.

I replied to a question posted by @wadds this morning about when the base rate economic stimulus would kick in. My answer was that the problem is there is little point in reducing the price of something that you can’t buy.  

As I have said before many lenders are not passing on cuts unless they have to contractually and consumers are trapped in current deals because of reducing equity levels. The reality is therefore that for many the base rate reduction doesn’t have much impact. 

For businesses it is great as long as they have a fixed margin above base rate. But with most overdraft facilities being on annual terms these margins are likely to be revised upwards offsetting the impact. That is if the facility isn’t pulled completely of course. 

Hence the second part of my answer to Wadds. It is like Monty Python’s Cheese Shop sketch. What’s the point of advertising something if you haven’t got the product to sell? Quantitative easing, printing money or any other term you like to use might solve this problem though it could have its own risks. Arguably like waiving chocolate bars in front of someone who is trying to lose weight! Still it would at least mean that the “shop” would have more products to buy. 

IMHO though the real answer lies in creating true wealth not manufactured wealth. To do this requires investment in the one part of the economy that actually creates real jobs – the SME sector. As I have also said in the past the current government has actually taken steps to discourage this not the opposite. Next month Mr Darling should announce radical tax and spending plans to boost the prospects of the engine room of the economy and link this to the government’s apparent “Digital” agenda. But I won’t hold my breath. 

Anyway enough of this lets get to the best part of this post! For anyone who hasn’t seen this sketch before I heartily recommend it and for anyone who has it is always worth another look

Today marks the start of Global Entrepreneurship Week. In their own words it is

“a worldwide celebration of enterprise, which aims to unleash young people’s enterprising ideas and address some of society’s biggest issues, from poverty reduction through to climate change. More than 70 countries are currently signed up to run their very own versions of Enterprise Week, all coming under the banner of Global Entrepreneurship Week!”

The UK’s part of this, Enterprise Week, is promoted as “Make your Mark Week” which last year consisted of over 5,000 events involving more than 500,000 people. The campaign has completely embraced the use of the online media, with pretty much every online resource you can think of – blog, Twitter, media resources,  Flickr, You Tube and more. Hopefully the week will inspire some great business ideas for the future.

Lord Mandelson was on BBC Breakfast this morning promoting the event and there is a quote on the site that has been approved for use from the Secretary of State for Business, Enterprise and Regulatory Reform,

“Small and medium enterprises are the backbone of our economy, with 4.7 million businesses last year contributing more than 50 per cent to the UK’s turnover.

The Government is on the side of small and medium-sized businesses and understands that they are facing tough times ahead.

We are working to create the right conditions for British enterprise by removing barriers, creating opportunities and supporting events like Global Entrepreneurship Week to inspire tomorrow’s entrepreneurs.”

I agree wholeheartedly with the first statement, but as I have said in the past, the Government’s actions last year of increasing small companies corporation tax and capital gains tax on sales of small businesses, do not support the rest of this statement. Lets hope this statement indicates that we are about to see a major U-turn on these things in next week’s pre budget report so that the enthusiasm that this campaign generates is supported through the difficult times ahead.

An aggressive statement I know and one I suspect some people will tell me I am mad to claim. I am only relating this to consumers however not too business where the impact on lending that is more often linked to base rates and the potential benefits to exports of lower exchange rates may produce some positive results. But my own current experience of remortgaging has got me thinking about the effect on Joe Public.

Leaving aside the debate about whether stimulating demand through cheaper debt is really the best thing for the economy in the long run or merely trying to recreate a bubble that has already burst, consider the following:

The average age of first time buyers reached 34 in 2006 having risen from 27 over the preceeding 30 years. So lets assume that the average age as a first time buyer of people who still have mortgages outstanding was 30.

Assume the average term of a mortgage is 25 years and therefore people finish paying it on average around the age of 55.

The average price of a house has apparently fallen by 15% over the past year and is therefore back to the levels it was at in 2006.

Tracker rate mortgages that would benefit from the reduction are only held by a small minority of people as fixed rates have been in vogue and the new deals being offered are either at hefty margins that pretty much wipe out the benefit of the reduction or require LTV levels of less than 60%.

Implication 1 - the majority of people under the age of 45 will be unable to benefit from the reduction either because they are already locked into a fixed rate or can’t switch to a competitive tracker even where one is available because their LTV is likely to be assessed at more than 60% through a combination of being too early in their mortgage term and/or their house price has fallen.

Implication 2 – If you are over 50 your mortgage is likely to be low as you come to the end of your term so even though you qualify for the sub 60% LTV the reduction in your outgoings will be relatively small in absolute terms. Meanwhile your investments including your pension fund which are now much more important to you than debt prices, as you near the end of your working life, have fallen in income terms – due to the very same base rate cut - and asset value terms due to the fall in the stock market.

Conclusion

The people who could benefit from a reduction in interest rates in their pockets and so potentially stimulate demand i.e. under 45s, won’t because for various reasons they can’t get a hold of the cheap money and the ones who can get a hold of the cheap money i.e the over 50’s have lost far more on their investments than they will gain in reduction in debt cost so are also unlikely to start spending more either.

So its all down to everyone between 46-49 to bail us out A simplistic analysis I accept but one with more than a grain of truth?

I was talking to one of our team the other day about music and the Boomtown Rats classic song from 1979 came up. The scary thing was the person concerned had never heard of it. I played her the song – still no recognition.

And that got me thinking. Here is a song from my childhood, that I love by the way, and here is this 24 year old to whom it means nothing and to be fair why should it? She wasn’t even born until years after it came out. But what else has this child of the Eighties missed out on that it looks like she is about to experience?

Recession.

The last recession effectively ended 16 years ago when she was eight years old. She wasn’t even born when the previous one ended in the early 80’s. But to be fair this doesn’t just apply to a 24 year old. If you were born in the year IDLM was released and are therefore 29 now you would have only been 13 when the last recession ended. You may have some appreciation of that period – maybe your Mum or Dad lost their job or your house was repossessed, but I suspect a very high proportion of people in their 20’s can’t really recall what life was like living and working during an economic downturn.

So what has all this got to do with the PR Industry you ask? Well I don’t have the exact figures but I would hazard a guess that the proportion of staff working in the PR Industry who are 29 or less will be somewhere around the 60-70% mark. If my guess is right then that’s the vast majority of people working in an industry who have never known what it is like to work in a recession.

How will they respond? Positively because they won’t be laden down with feelings of inevitability? Or negatively if they don’t recognise the need to up your game big style during times like these?

Only time will tell, but in the meantime let us “console” ourselves with a truly great piece of music (even if the story behind it is clearly not a pleasant one). Particularly anyone for whom it is new.