There’s an interesting piece of research out this morning from BDO, an accountancy and business services consultancy. Its quarterly Industry Watch, which makes projections about rates of company failure, suggests that Britain’s “two-speed recovery is starker than ever”.
There are a couple of points to make here. The first is that we shouldn’t expect a recovery to be ‘one-speed’. The assumption that it ought to be reflects, I think, a misunderstanding of the boom-bust-recovery business cycle, and owes something to the Keynesian obsession with economy-wide aggregates – which frequently mislead more than they enlighten, particularly in times of economic volatility.
The thing to realise is that busts are usually the products of preceding booms. Typically, the boom is fuelled by expansionary monetary policy, which leads to too much easy credit and pushes market interest rates below their natural level (i.e. rates which balance the supply of savings with the demand for loans, and which signal the extent to which people are willing to forgo present consumption in favour of future consumption). The result is that people make bad decisions – they systemically take on too much debt, and invest too much in marginal projects.
Crucially, this affects different sectors in different ways. In particular, you get bubbles in those parts of the economy which are fuelled by credit, like housing, construction and financial services. Resources are sucked towards these bubbles – as they grow, more and more people want to jump on the bandwagon, creating a self-reinforcing cycle. Eventually you reach a point where the economy has grown completely out of kilter with the real, underlying demands of consumers, and any tightening of credit conditions will bring the house of cards tumbling down. Enter the recession.
Now, if recessions are about unwinding the mistakes of the boom years – liquidating unprofitable investments, paying down debts, reallocating scare resources and coming up with new plans to reflect changed consumer preferences – then it is inevitable that any real recovery will, of necessity, be ‘multi-speed’. Some sectors need to shrink. Others must simply weather the storm. And for a few, the recession presents an entrepreneurial opportunity – a chance to grow and prosper. Of course, this process happens within sectors as well as between them. The point is that recessions are, or at least should be, periods of dynamic change, of creative destruction writ large. Different sectors, let alone different companies, do not rise and fall like boats on a tide. What you get instead is constant churn.
The other interesting point to come from the BDO research is the relative strength of the technology, media and telecoms sector – and the finding that the best performing retailers are the ones who are capitalising on the new opportunities that technology, media and telecoms offer. This is a useful reminder of the overwhelming force of human innovation, which can drive forward growth and progress in ways no central planner could ever imagine. But it is also a warning – the government’s forthcoming Communications Bill, which represents the first effort to systematically regulate this emerging sector, must not strangle the life out of this revolution, or force it overseas. I wish I could say I had more faith in our lords and masters, but I don’t.