Business East Midlands
April 2008
Michael Davis, CFE Managing Director and chairman of Lastolite wrote an article for local business magazine Business East Midlands considering what can be learnt from the current economical crisis.
Last month I attended two business lunches, one in London and the other in Leicester. The one in London was a very dour as city financers and economists gave their very pessimistic assessment of the current financial turmoil. At the very least they feared for this year’s bonuses and at worst probably their jobs and I left with the very distinct impression that the safest place for my meagre savings would be under the mattress. The second lunch in Leicester was a much more upbeat occasion, and whilst those present were certainly aware of the daily reporting of financial disasters, the overall message was one of buoyant order books, business growth and increasing profitability.
So how do you resolve these conflicting accounts?
The Governor of the Bank of England provides an important clue where he recently commented that the financial press need to get out of London a bit more to see that things are not so bad in many parts of the country. In other words there is a difference between a financial crisis and an economic one. We are in the grip of the former, but not the latter and whilst things will get tough we shouldn’t assume that from one the other will flow at the same level of impact. But there were two more ‘takeaways’ from these lunches.
The first is that from this financial crisis will flow some form of an economic slowdown and not because city financers won’t be getting their bonuses, but because it is a reminder that ultimately we can only spend what we have earned. Over recent years much of our economic growth has been funded by credit; individuals and government are equally guilty, but at some point you have to pay it back, the crisis in part arises because we forgot this. For example, consumption fuelled by rising house prices simply brings forward consumption from the future; it isn’t real growth, just borrowed growth from our kids as they have less disposable income after servicing the costs of over inflated house prices. So for the sake of future generations a credit crunch is a good thing.
Following on from this, my observation is that about every seven to eight years some part of the global economy manages to convince itself that it has found the metaphorical equivalent of turning base metal into gold. Last time it was the ‘dot.coms’ this time it is how credit is financed. In both instances there has been collective amnesia of the economic fundamentals. Real growth comes from what economists refer to as pushing out the ‘production possibility frontier’ in other words making something new for which there is a new market, or taking something you currently do and doing it better.
Which brings me to the most important point; by chance those attending the Leicester lunch were predominately the owners of family businesses, some of which were over 20 years old.
They had the collective memory of knowing what a real economic downturn was and had clearly prospered as a result. What they embodied was a long term commitment to the success of their business, underpinned by never forgetting that real growth comes from staying close to your customer and a fierce resolve to continually invest in products and services that add value. In the face of an economic slowdown, now is the time to invest with even more determination for the future. Contrast to the short term tendencies and incentives of city financiers and you can then account for the difference in outlook between the two lunches.
Michael Davis, CFE.