Getting the bounce back into the economy

What has surprised many commentators is that the downturn has been fairly broad-based across industry sectors. While initial forecasts had the recession concentrated in financial services and construction, the severe decline in output in the past six months has been far more widespread: the service sector, which has supported growth in recent years, has endured a marked period of contraction, led by distribution and business services. Manufacturing was down sharply and construction output is depressed by a very sharp fall in housing starts and the cancellation or postponement of many projects.

The relatively broad-based nature of the downturn, together with an inherent flexibility and agility, may indeed explain why the smallest firms have proved themselves so resilient, with an insolvency rate below that of their larger counterparts.

Overall, conditions remain weak as the global recession depresses exports, while domestic demand is undermined by low levels of confidence, falling business investment and house prices and a weak labour market. Business investment in particular has been hit hard by the worsening of the global financial crisis in the wake of the Lehman Brothers’ collapse. While some commentators talk about green shoots appearing, trading conditions will remain extremely tough in the short term.

Businesses of all sizes will now be looking for the stabilisation in the business economy. Factors driving that recovery will include the renewal of lending to businesses and an increased export demand, buoyed by the weak pound. But this recovery curve will be restrained by weak export markets, particularly within the European Union, rising unemployment and a further rise in the savings rate, as households continue to worry about job security.

As a result, recovery is likely to be slower than during the last recession and without the booms in key sectors witnessed in the past. While start up activity will get a boost as confidence in the economy gradually increases, we will not see the same rapid expansion of the business services sector again.

Market participants in all sectors will have to grow accustomed to slower rates of growth as the boom years of the 1990s and 2000s become a distant memory. Nor will growth be dominated by a few frothy sectors, such as financial services or construction. Instead, growth will be better balanced. Services will continue to lead the way, providing a healthy, if not exciting, rate of return.

On the whole, the business landscape itself is unlikely to look a great deal different. Survival of the fittest means that weaker firms will fall by the wayside, particularly in those sectors with an abundance of suppliers and organisations that aren’t able to differentiate themselves on the price, loyalty and service fronts (these marketing tenets will be significant in the business environment too…). The business base as a whole is likely to emerge stronger and more stable. Good news for those businesses ready and prepared to ride the recovery curve.