Recession warning: what’s your plan?

The Government’s own economic indicators are bleak. Now would be a good time to check your recession fitness.

It’s hard to believe that there could be a recession looming walking around towns and cities in the UK. Airports and ports are busy with people getting away on Easter breaks. We’re still dining out and travelling on a post pandemic euphoria.

I’m an optimist. It’s not in my instinct to talk down the economy but all lagging indicators are bleak. Economic data points published by the Government this week are the strongest signal yet of economic turbulence ahead for the UK.

Gross domestic product (GDP) grew by 0.1% in February 2022, following 0.8% growth in January 2022.

Services grew by 0.2% and were the main contributor to February's growth in GDP; this was partially offset by production, which fell by 0.6% and construction, which fell by 0.1%.

The Consumer Prices Index rose by 6.2% in the 12 months to March 2022, up from 5.5% in February.

The underlying issues driving GDP down and inflation up are cost pressures created by the lifting of the energy price cap, supply chains reopening after COVID-19, and Brexit.

Energy price increases of 50% cannot be absorbed by any business. It costs more to import and export goods than it did before Brexit, and we’ve cut off free movement for EU workers, removing them from the UK workforce.

There are also strong anecdotal indicators. According to Lloyds more than 1.2 million subscription payments have been cancelled since the summer as people feel the squeeze. A record 2.5 million emergency food parcels were distributed by the Trussell Trust last year. The actual number accounting for independent food banks is likely to be double.

Pressure on salaries is already unsustainable. If you’re increasing salaries by five percent in a market where inflation is six percent the impact in real terms is a salary cut.

A second COVID-19 recession is wholly avoidable

Just as businesses are starting to recover from COVID-19 there’s a new crisis on the near horizon. A second COVID-19 recession looks almost inevitable.

There is almost no one in business or politics with experience of the current economic situation. Inflation last ran at this level in the early-90s.

Increasing interest rates as a throttle on inflation makes no sense as a response to non inflationary cost pressures due to Brexit and the unwinding of the energy price cap.

The Government is relying on households that have made savings over the past two years during the pandemic to spend to enable the UK to hold off a recession. It shines a harsh light on the weakness of current economic policy and the inequalities in society.

We’re still waiting for the so-called Brexit dividend. It’s going to be a long wait. It increasingly looks like a foolhardy ideology.

The Government has its own issues dealing with the fallout from breaches of COVID-19 rules in Whitehall. Instead of dealing with the issue the Prime Minister and Chancellor are focussed on saving their own jobs. The Russian war with Ukraine has also become a convenient diversion.

A recession is wholly preventable, but it requires the Government to increase borrowing and investment. This isn’t something any Government wants to do with an election two years away, especially having borrowed recklessly during the pandemic.

My fear is that the cost-of-living crisis created by Brexit, rising energy prices, and a lack of economic policy as the economy emerges from COVID-19 could trigger an unemployment crisis that leads to a housing crisis. It’s easy to envisage a situation where the economy unwinds.

Health check your business for a recession

What can you do? In the headwind of a recession the solution for business and households is much the same. There’s nothing you can do about external factors, but you can manage your own cash and costs.

Manage all discretionary spend. Unfortunately, those markets such as culture, entertainment and hospitality that were hit hardest by COVID-19 will be at the sharp end of a recession.

Review any long-term financial commitments and ensure that you’ve enough cash. If not, start reviewing your options.

The heat must come out of the employment market however salaries rarely ever go down. Invest long term in an employer brand proposition to build a better company.

Increase prices where you can for new work and take the opportunity to renegotiate contracts. Think hard about pricing long terms contracts.

Take a hawkish view of debt. Reduce the lines of credit you extend to clients and take action to limit any debt.

There is opportunity in any crisis. Areas of digital transformation such as education and training, healthcare and technology are likely to remain resilient.

We should be investing in carbon reduction and a green economy. Ironically this would be the greatest hedge against the energy crisis and yet it is viewed as a luxury in a recessionary climate.

We should also be raging with anger at our political leaders, not for breaching their own COVID-19 rules although that is outrageous, but for creating a wholly avoidable situation.

I know that I am.