While articles in the news now regularly include the word recession, the EuroZone is looking worse by the day, and nobody seems to know what the fallout of this will be to the wider economy, I don’t hear much in the way of good news put out by the media. This is a shame really as there is good news and with a positive perspective there are business opportunities out there for those who choose to look for them. Perhaps its easier for the media not to look, but they continue to make a bad situation worse in my opinion.
To illustrate my point (and if you are an economist you can start cringing now) here’s how I see it. In simple terms, the economy is like a merry go round. Let’s take three fictitious companies and an ultra-simplified scenario:
Company A – Steel PLC – a large company that sells steel.
Company B – Tongs Ltd – a small company that sells tongs made from steel.
Company C – Fireplaces Ltd – a small company that sells fireplaces made from steel.
Steel PLC sells steel to Tongs Ltd. They do good trade between them, because Tongs Ltd needs the steel to make its tongs, and Steel PLC needs the tongs as part of its steel manufacturing process. The two businesses are mutually supportive.
Fireplaces Ltd buys from Steel PLC to make its fireplaces. In order to beat its only competitor in the fireplaces market, it also buys from Tongs Ltd to provide fireplaces with tongs, which is a significant added value which its competitor cannot match.
In a positive economy, this market model would work well, with other companies and services fitting around the three companies mentioned.
The problem comes when Tongs Ltd reads the headlines about the economy and panics, worried that Fireplaces Ltd is going to stop buying tongs. Tongs Ltd therefore preemptively reduces its monthly order from Steel PLC, putting the cash away just in case it needs it. The system was working fine up until that point, as people need fireplaces (they do in this community anyway!) and there was no need for Tongs Ltd to panic, but they did.
Steel PLC sees a subsequent reduction in orders, and after a while is forced to scale back production to avoid being left with an excess of steel on its balance sheet tying up its resources. It slows down purchases from other suppliers as a result, and lays off some staff. Many of these staff were planning to buy a fireplace, so Fireplaces Ltd finds that it too experiences a drop in orders, which in turn affects Tongs Ltd because Fireplaces Ltd doesn’t need as many tongs as before because its not selling as many fireplaces. Tongs Ltd therefore further reduces its orders to Steel PLC and is pleased with itself for spotting the looming slowdown in orders from Fireplaces Ltd oblivious to the fact that by panicking a few months previously, it helped to cause the trade slowdown.
After some months, Steel PLC has slowed production and has laid off two thirds of its staff, to the point where it just ticks over, keeping production running at a very basic level with just a third of the output of the plant from previously. Fireplaces Ltd have few customers left, as the staff remaining at Steel PLC are worried about their jobs and they have stopped buying quality fireplaces altogether, preferring the really cheap ones imported from overseas. Tongs Ltd, reliant on Fireplaces Ltd for orders, and now seeing the reduction in orders from Steel PLC looks at the dwindling cash reserves and decides to call it a day before it gets into trouble. A few months later Fireplaces Ltd loses its last customer to the cheap import company because it is no longer is able to supply tongs with its fireplaces. Steel PLC is left with no customers and seeks a Government subsidy to avoid closure, being forced to buy tongs from a more expensive supplier.
While a highly simplified model, this is a microcosmic view of the current market conditions across many countries around the world. Companies like Tongs Ltd are panicking and are putting money under the mattress, thus creating their own problem down the line. As a result companies like Fireplaces Ltd are going out of business on a daily basis, not because of poor working practices or an inferior product, but because they simply cannot afford to continue to trade.
In the above example, with only one company left in the fireplaces market, the cheap importer can suddenly increase their prices without fear of losing any trade because they have no competition left. The major PLC will ultimately fail because nobody is left to buy their product, as evidenced by the demise of the UK steel industry, because the cheap importer from overseas buys his product from a company in China who uses a local steel company that can take advantage of cheaper labour costs and lower overheads.
The creative industry is a little like this. We speak to many smaller companies than us, often providing advice and support for those who are leaving university and trying to find their feet on the professional ladder. Many of these agencies are struggling at the moment, and good talented people are finding work in non related fields purely to make ends meet. Many of these will be lost from the creative sector altogether, and we know of other companies who are finding the going particularly tough at the moment, especially those who don’t have a national presence. The upshot of this just in the creative sector is that this is going to come home to roost in the next decade or two when we are looking for the next batch of visionary leaders with serious industry experience to maintain our key global positioning at the forefront of the sector, but I’m pretty confident that we’re not the only industry that’s going to suffer in this way.
When I met with the Bank of England recently and was advised that the economic situation is likely to continue until at least the end of the current administration, I wonder how many companies like the three fictional ones described earlier were going to be left when the dust settles. Protesting about the situation by sitting in a tent outside St Paul’s Cathedral or throwing rocks at the police isn’t going to make any positive difference at all. Indeed, all this is doing is to cause the various Government’s around the world to clamp down on civil liberties even further.
I fondly recall Dads Army which was on re-runs when I was a boy, and the words of Clive Dunn in his role as Corporal Jones “Don’t panic, Mr Mainwaring” are as apt for the UK economy now as they were when Dads Army was set. Ironically, Mr Mainwaring was also a bank manager as well as a Captain in the Home Defence Force, and he had to put up with chaos within his organisation, not helped by Private Frazer played by the late John Laurie going round saying “We’re doomed, I say. Doomed.” to whomever would listen – a bit like the media today. They never were doomed, of course, and somehow they always came through whatever trials and tribulations they were up against.
If you really do want to do something about the economy, draw your money out of the bank – it’s doing you no good in there anyway – and buy a UK product from a UK company. If we all did this it would re-energise the market for products, kick start retail, which in turn would breathe life into the manufacturing industry, and as a result would create new jobs in all sectors which will allow more people to spend more money, and so the engine of the UK economy would wheeze back into life, and the money go round will keep on spinning regardless what they do in Europe.
You may recall Joe Cabot in Reservoir Dogs saying “Let’s go to work”. Let’s hit the ground running in 2012.
