Sunday, March 01, 2009
Not everybody gets skittled by recession
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Who does well and who gets hit hardest in recessions? The impression you sometimes get is that everyone is bowled over together. But some parts of the economy are relatively recession-proof, not just the public sector, and others emerge not just standing but stronger.

We know quite a bit about the story so far, thanks to detailed gross-domestic- product figures released last week. They confirmed the economy shrank by 1.5% in the final quarter of 2008, the drop helped considerably by a big fall in inventories as firms ran down stocks rapidly.

With luck, that big inventory fall should mean subsequent quarterly falls this year are smaller, a necessary step on the road to stabilising the economy and then recovery.

Since the recession began in the middle of last year, GDP has shrunk by 2.2%, almost as much as its 2.5% peak-to-trough fall in the recession of the early 1990s. Within that 2.2% fall, however, there have been some very varied experiences.

Manufacturing, down 7% (and already in decline when the economy-wide recession started), has fared much worse than services, down less than 1.5%. But some bits of the service sector have been hit almost as hard as manufacturing, notably the wholesale and retail trade and transport. Others, however, have been surprisingly immune.

The official figures show, for example, financial intermediation — financial services — continued to expand in the second half of last year, surprisingly growing by 1.5% as the rest of the economy shrank.

Though this goes against every headline we have been reading, there is a logical explanation. Dealing in stocks, bonds and currencies was strong during the highly volatile second half of 2008. Banks increased their margins. Lending continued to grow, though slowly.

"Landlording", owning and letting out property, was also up, by 0.3%. Telecommunications (and post) is also a growth area, up 2.8% in the second half of last year.

The figures show considerable variation when it comes to spending. Some categories were weakening before mid-2008 but since then consumer spending is down 0.9%, investment 5.9% and exports 5%, though imports also fell 5.6%. If you want growth, look to the public sector, with government spending up 2% in the second half. All the figures are inflation-adjusted.

The breakdown shows that for all the talk about rebalancing the economy away from consumer and government spending, more desirable components of demand — exports and investment — are suffering the most. Similarly, rebalancing the economy towards manufacturing and away from financial services and property may happen but is not happening yet.

This is a variation of what Bank of England governor Mervyn King said last month when he talked of doing things that look like the "diametric opposite" of what would normally be sensible. In current circumstances, any growth will do.

While some categories of consumer spending are clearly very weak (notably cars), retail sales have held up well in both the official figures and the surveys.

There are several possible explanations, including the Bank's dramatic reductions in interest rates and a recovery in real incomes, but anybody who thumps the table and dismisses as ineffective the Vat cut that came in on December 1 is probably revealing ignorance of the data.

Consumer spending may yet succumb more dramatically under the weight of rising unemployment, though in the last recession it began to recover even as the jobless total was rising strongly. But we'll see.

As for the split between manufacturing and services, industry's problem is that it is exposed to the full bracing effects of the global recession while significant parts of the service sector sell only in Britain and are shielded from those effects.

Economists at Price Waterhouse Coopers, in an analysis to be published this week, have re-run an exercise they last carried out at the beginning of this decade.

PWC's Michael Nowak and John Hawksworth looked at 15 different sectors of the economy and assessed their vulnerability to the downturn on the basis of a series of different measures that together add up to a sector-vulnerability index.

These fall under three headings: current financial strength, cyclicality and growth potential. The least vulnerable sector would be one that entered the recession financially strong, was not exposed to the cycle and had a history of strong growth.

The most vulnerable sector is financially weak, exposed to shrinking world markets and had a poor run of growth. It sounds simple, though the PWC economists have added on a few sophisticated statistical nuts and bolts, including what they describe as economy beta, equity beta and firms' so-called quick asset ratio (cash they can quickly lay their hands on versus current liabilities).

What they end up with confirms that this is not a great time to be making things, particularly metal things. The most vulnerable sector is metal products, with engineering at No. 4. Also in the top five most vulnerable sectors are financial services — suggesting a big hit is coming its way — hotels and restaurants, and transport.

At the other end of the scale, utilities are least vulnerable, followed by food retailing and, also among the five least vulnerable, food manufacture. Surprisingly, chemicals and non-food retailing also feature. There may be a "survival of the fittest" element; some of the retailers that have already failed were probably past their sell-by date.

Some precedent may be useful. In the last recession in the early 1990s utilities increased their output by 10%, chemicals and food retailing by 5% each, and food manufacturing by 3%.

Just to complete the picture, sectors with middling vulnerability are post and telecommunications; construction (supported by infrastructure spending); oil, gas and mining; textiles; and business services.

Such exercises are useful, to remind us that all recession experiences are not equal. As always, though, individual businesses vary widely, even in the same sector. Nobody should throw in the towel, even in the most vulnerable spots.

PS: This week could be historic. It may mark the low point for interest rates in the present cycle — the last of the cuts — and the beginning of a new phase of monetary policy, quantitative easing, boosting the quantity of money.

The February minutes of the monetary policy committee (MPC) raised questions about whether further reductions were warranted. The "shadow" MPC, which meets under the auspices of the Institute of Economic Affairs, votes 5-4 to leave Bank rate unchanged at 1%. But markets expect a reduction to 0.5%.

The emphasis now switches to unconventional measures, including quantitative easing. All nine shadow MPC members favour the unconventional but differ on precisely how the Bank should go about it. This is harder than deciding where interest rates should go.

Tim Congdon, a shadow MPC member, says "underfunding" the budget deficit or, as he puts it, government borrowing from the banks, would stop the recession dead. He could be right but there's a T-shirt on the Bad Science website with the slogan "I think you'll find it's a bit more complicated than that", which I am thinking of taking to wearing.

One thing that sticks in my craw is people saying the government should not encourage banks to lend because we have enough debt already. That misunderstands where we are. We had too much lending in the past but too little recently — ask any business that has had its overdraft facility cut off or cannot get finance for working capital. There is nothing irresponsible about restoring a normal level of lending.

From The Sunday Times, March 1 2009