We're still not out of the woods

Jun 9 2010 by Andrew Hebden, The Journal

Two years ago leading behavioural economist Roger Martin-Fagg told a meeting of chief executives in the North East to bunker down for an imminent recession. Yesterday he returned to the region to warn that the tough times aren't over yet, as Andrew Hebden reports.

A LOT has happened to the economy over the last two years and while it would be an exaggeration to say Roger Martin-Fagg saw it all coming, no-one who heard him talk at the Morritt Hotel in Barnard Castle on June 11, 2008, can say they weren’t warned.

In a presentation to the North East and Cumbria groups of the Academy for Chief Executives, he predicted that the UK would be in or close to recession by 2009 with no recovery on the cards until 2011 at the earliest. He also warned that house prices would continue to spiral and said that a big rise in unemployment was on the cards.

Yesterday he was back at the same hotel talking to the same group about what now lies ahead. And he is clear that, far from the economic crisis being over, it has simply moved on to a new phase.

“Lots and lots of people in the UK are in a state of denial,” he states, in typically direct terms. “The debt problem is still there, it has just moved from the private sector balance sheet to the public sector balance sheet. The debt hasn’t gone away.”

While two years ago, Mr Martin-Fagg’s focus was firmly on the challenges that lay ahead for the private sector, today his warnings are directed towards those reliant on the public purse. He is encouraged by the start the new coalition government has made in this regard, saying that Prime Minister David Cameron has clearly spent this week “softening people up for some pretty hefty cuts that will be spread out over the next five years”. He expects some 300,000 public sector jobs will go in the next three years.

Much has been written about the unprecedented nature of the cuts that lie ahead, but Mr Martin-Fagg refutes the suggestion that it is mission impossible. He says the £65bn in cuts planned for the next three years amount to a 10% reduction in government spending – a huge chunk, but something that has been achieved in countless private sector companies since the recession began.

“If you talked to any business over the past two years and told them they needed to lose 10% off their costs then they would just say: ‘Let’s get on with it’. Yes, we’ll all be working harder, but the business will still be there.

“In other words the idea that it is impossible to achieve these sort of cuts is wrong. It is an attitude or state of mind. I don’t deny that it is more difficult in the public sector because there are so many stakeholders and interest groups. But it can happen.”

Mr Martin-Fagg says the cuts are necessary and believes that in five years’ time “we’ll look back and say it was the right thing to do”. Without the reductions in spending, the UK’s AAA credit rating would be under threat and it would be difficult to keep interest rates below 5%, he says.

But he dismisses comparisons with the measures taken under Prime Minister Margaret Thatcher during the 1980s. Deputy Prime Minister Nick Clegg said at the weekend that there would be no return to the cuts seen at that time, but Mr Martin-Fagg said: “Everyone thinks that the Thatcher government cut spending but they didn’t. They actually grew spending in real terms by 1.6% a year. This is going to be much tougher than Thatcher.”

As for the economy’s future prospects, he is pessimistic about the chances of avoiding a “double-dip” recession but he predicts the coming downturn “will be shallow”. He says the economy will still be “hobbling along during 2011”, warning that a huge increase in private sector investment is required but unlikely to happen.

Mr Martin-Fagg is also concerned that levels of consumer spending are unlikely to be sufficient to stimulate a recovery, pointing out that while unemployment has not risen to levels seen in previous recessions, people’s take home pay has fallen. “Real wages have barely grown. In actual fact, people are worse off now. For the recovery to gather momentum, we need consumer spending to rise,” he says.

He draws comparisons with the stagnant economic growth seen in Japan during the 1990s: “I don’t think we are going to be in a Japan situation for 20 years but the next five or six years will be Japan-like.”

But Mr Martin-Fagg, who two years ago predicted that strong businesses would benefit during the recession as weaker competitors were wiped out and good people became available for employment, has some advice for businesses as they prepare for the challenges ahead.

“Don’t use the recession as an excuse and be absolutely clear on your value proposition,” he said. “Be clear why people should buy from you rather than your competition.”

And he says that, while the North East may be vulnerable due to its high dependence on public sector jobs, the region’s private sector could be well placed as the recovery kicks in.

“There are some first rate manufacturing enterprises in the North East and those that export a great deal of their output are enjoying some good growth at the moment because of the weakness of sterling,” he says.

“There were a lot of businesses that were pretty good before the recession and some that are very good because of it.”