29 Apr 10 Greece, Debt, Contagion and Political Change

Unlikely bedfellows you may think, but two articles from the Institute of Fiscal Studies[1], [2] can help us to see the type of future that may await us, particularly for the losers of the Great Recession, those that I call the “bloc #3“.

The key points from the above articles are:

(1) Public sector spending has risen strongly in bloc #3 (and the so-called PIIGS with the exception of Italy) 1997-2010 as is illustrated below:

Source: [1]

(2) In view of the crisis in Greece (and potentially many others) interest rates on sovereign debt are rising – the cost of borrowing is increasing beyond that envisaged.

(3) Just as interest payments on national debt are rising, so are welfare payments as, for example, the Generation X “baby boomers” age and retire.

(4) In the UK, the massive injection into public services has not delivered, as Chote puts it, the “bang we get for each buck”. In other words, the return on investment is lower than would have been expected from the private sector.  This observation may apply in other countries too (although I have not yet researched this point).

All four combine to produce pressure for the so-called “austerity measures” to reduce debt levels.

But we must couple these observations with those of Caldwell[3] who notes that in the above countries there may not be the stomach for massive spending cuts – the “austerity measures”.

So, we must look beyond the well-publicised spending cuts to see the true long-term  impact, which could be felt not on the economic stage but the political stage.  Could this  even embrace the total rejection of capitalism and the re-emergence of – wait for it – communism[4]?

Hopefully this will start a debate.

References
[1] Chote, Robert Two questions the leaders must answer tonight. The Times. April 29 2010.
[2] Crawford, R and Emmerson, C The axe is coming soon and it will hurt, warns the IFS. Public Service. April 21 2010.
[3] C. Caldwell, “The Weekly Standard,” The Weekly Standard, Apr. 2010.
[4] N. Lezard, “First As Tragedy, Then As Farce by Slavoj Žižek,” guardian.co.uk, Oct. 2009.

Tags: contagion, cost of borrowing, Innovation, recession, sovereign debt, welfare payments, welfare state

24 Jul 08 Recession – A business survival guide (Part 3 – Portfolio Balance)

In past entries I have argued the point that recession is a time to crank up innovation – not to cut investment in it. In my last blog entry I referred to the “Aldi Effect” – in a recession customers will change their buying habits and preferences. The real danger is loss of customers that won’t come back when economic conditions improve.

The latest results from PepsiCo demonstrate this point. Sales of soft drinks and water are declining – due:

1. To less money in consumers’ pockets and
2. Greater environmental awareness – a drive to use less plastic for bottles.

The lesson is that PepsiCo’s sales have been partially saved by the breadth of its product portfolio – snack foods are appearing more attractive to cash strapped consumers.

So a core activity must be now to determine how your customers (consumer or business) will change their buying habits and to supplement, if necessary, recession resistant offerings to prevent a haemorrhage of customers that may never return.

Information Source: Wiggins, J (2008) US economic downturn makes life hard for PepsiCo’s soft drinks. Financial Times. July 24

Tags: business survival guide, economic downturn, Innovation, recession