Business Insight: Is a recession inevitable or can it avoided?

The last week has seen more concerns raised with the increase in interest rates and a greater understanding that inflation will reach a 10% level by the last quarter. Few governments have been able to avoid a recession from such a position. However, there are new economic rules being created all the time, so what does the picture look like?

There was the news that Amazon made a loss in Q1 for the first time since 2015. If Amazon, which seemed to sweep all before them during the pandemic, is seeing a decline, what does this mean for the wider economy? It does fairly raise the question on how the consumer is viewing expenditure.

Barclays last week released their Liberum Leisure report which gave a number of insights:
• For the leisure sector, the report noted “After a slow start to 2022, the sector is gathering momentum as final Covid restrictions are lifted and supply chain issues ease. While inflationary pressures continue to present significant challenges, especially in light of the Ukraine conflict, we believe consumer demand will remain resilient, with a reduction in supply helping to rebalance the equation. In particular, we expect the more experiential focused operators to outperform as consumer priorities are re-set.”
• The report goes on to note that “Despite the clear inflationary and economic challenges, underlying trading has remained robust across the leisure sector with data cautiously pointing towards a continuation of consumers prioritising spending on experiences and leisure activities over things. Nonetheless, operators face multiple headwinds in the form of labour shortages, inflationary cost pressures, rise in taxes and fall away of final government support; along with a squeeze on overall consumer spending and increased geopolitical risks.”
• The number of casual dining outlets had fallen by 17% with survivors taking share.
• On a positive note, the report states “Consumers set to prioritise experiences over things. £300bn of consumer savings, low unemployment and high house prices support consumer spending. Optimism for a full return of international travel in summer 2022. Delivery sales holding up with minimal cannibalisation of eat-in sales. We forecast labour, supply chain, energy and wider inflationary pressures to ease by summer 2022. Decline in competition will support well-capitalised survivors and roll-out strategies. Suppressed valuations provide excellent buying opportunity.”
• On the counter scale, the report notes “Labour shortages and wage inflation is to remain at above normal levels in 2022. Supply chain and extreme energy costs are to squeeze margins further. Reduced VAT rate and business rate savings are to end in the coming weeks. Inflationary environment to put a squeeze on consumer discretionary spending. Low levels of consumer confidence. Difficult economic and geopolitical environment creates uncertainty”
It is certainly a difficult market to read and one which will need to be taken step by step. The Bank of England report last week avoided using the word recession, even though journalists were quick to jump on this. The report really forecast the economy flat lining at 0% growth through 2023 and 2024. Whether it grows at 0.1% or contracts at 0.1%, hence a technical recession, is irrelevant. Basically the report is forecasting 1970s style stagflation.

Secondly an economy being at 0% growth for two years is inherently unlikely, something is going to happen to change that one way or the other.

Moreover these were always going to be difficult times; known from the start of the pandemic which was bound to change and impact on the economy profoundly. Here lies an interesting point as the reports do not discuss what action the government will take and it has been government action which has impacted and safeguarded many during the 2008 financial crash and during the pandemic. During the crash, interest rates fell at some speed making money cheap to borrow and these rates have remained low for over the last 14 years. During the pandemic, government support did save many companies and livelihoods.

Last year, many celebrated the economy’s bounce but it was known that difficult times did lie ahead; inflation was already being forecast to rise but the Ukraine- Russia war has complicated the picture and increased the pressure on the consumer, the economy and on the government. How each responds during the next two quarters will determine what does happen.

This may sound obvious but there seems to be a confidence that the consumer is placing on experience over other things. The argument, as noted above is that with strong savings, the consumer has a cushion in these difficult times but is this true? The Government has already noted their “levelling up” programme has become that much harder with inflation and interest rate rises. City centres are still struggling to get back to strong density levels.

As has been the case over the last two years, there are more questions than answers and much still to be seen.