Hunkering down for a recession Wednesday, January 30, 2008
Many conversations I've been engaged in during the past couple of months have, at some point, turned to the topic of a recession. Be it concerns over job security, bonuses, property prices or the prospects for businesses, people are increasingly worried about the future. Buffeted by increases in the cost of living e.g. food, power and transport costs, and income constraints, a growing number of households are contemplating "belt tightening".
Generally a household has three options to maintain their current standard of living
- work more hours - not relevant if one is salaried, but perhaps a non-working spouse can enter the workforce or the main worker can take second job. Yet this erodes leisure time. Moreover, second jobs will generally yield a lower marginal wage and "professional" classes will desist in engaging in "menial" work.
- sell assets / erode savings - a temporary solution assuming one has ready access to assets. For most people their biggest financial asset is their house which is hardly liquid, especially in the current climate and whose sale may breach the objective of maintaining a standard of living.
- borrow - this route is what has fuelled the boom of recent times but it too has a capacity constraints associated with collateral you can offer and your ability to make repayments. By definition, repayments will reduce available disposable income.
Thomas Cook today announced that foreign holiday bookings remain strong, despite a 2% fall in bookings over last year. Yet this is undoubtedly one of the first items to be cut or scaled back given its discretionary nature. Nonetheless, Thomas Cook also revealed it has scaled back capacity this year primarily to trim its costs, but commentators also suggested it was linked to expectations of failing demand and likely changes in spending patterns.
The biggest challenge right now is optimism or lack thereof. When people are optimistic they will engage in more speculative endeavours and spending. However, talk of recession can effectively become self-fulfilling as people hunker down and prepare for adversity. This applies equally to individuals and companies. Projects and investments get cancelled or fail to gain support, discretion spending is rained in and purchases may be downgraded or delayed. People hoard cash and avoid making investments, whilst banks restrict lending via changes in lending criteria and higher rates.
How can this gloomy mood be lifted? That's the challenge facing policy makers right now. Sadly the Government can't rely upon national success in football as the home nations failed to qualify for the European Championships. Ho hum.
posted by John Wilson @ 8:21 AM Permanent Link
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