Recession Strategy |
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Page 1 of 2 You are probably considering how to best handle the current
economic environment both tactically and strategically. What follows is
a summary of the general advice being provided. For advice targeted to
your business and current situation, call the author of this article,
Peter Boyce, Director of Consulting @ TMG
You are probably considering how to best handle the current economic environment both tactically and strategically. What follows is a summary of the general advice being provided. For advice targeted to your business and current situation, call the author of this article, Peter Boyce, Director of Consulting @ TMGAbout a possible recession Australia may avoid a recession (by a whisker) as a result of six factors: 1. A proportionately smaller exposure to sub-prime mortgage finance losses than in the US, Britain and many other countries 2. A healthier starting point than most countries: for our banks, a current federal budget surplus and no federal debt (though exorbitant private household debt) and a system which encourages low default rates on home loans. 3. Immediate confidence building in the form of the federal government guaranteeing deposits and inter-bank lending to prevent our local finance system from ceasing to function. 4. Immediate consumption support to keep business trading more normally (eg $10.4Bn pre-Christmas payments and housing market support) 5. Pump priming for jobs (eg accelerating infrastructure projects) 6. Continued interest rate cuts expected over the coming months by the RBA. The business environment, however, remains very uncertain, probably well into 2009. Business strategy at this time should take advantage of that uncertainty. The source of uncertainty The uncertainty has three sources. Financial Markets : At the time of writing (October 17, 2008) the contagion of sub-prime mortgage losses, whilst continuing to suppress inter-bank lending, definitely appears to be easing in its effects. Given the liquidity and investment being pumped into financial institutions by governments and treasuries around the world, this is no surprise. Provided the “tanking” of asset values stops soon, the financial system should continue to improve. Share markets : The flow on of losses from finance stocks to other sectors is driven by poor access to credit and the consequent rapid slowing of spending flowing on to reduced future profits and therefore company values. At the time of writing (October 17, 2008) global share markets, whilst still incredibly volatile, are gyrating both up and down, suggesting investor sentiment may be working toward a collective pause to absorb the effects of government action around the world aimed at stabilizing the financial system. It may not be too long before the gains begin to outweigh the losses but do not be too quick to judge. The gyrations need to be smaller and be present for 2-3 months before this ‘bear’ is dead. Real Markets : Again, at the time of writing (October 17, 2008) the spill over effects of the financial tsunami of the September Quarter will ripple through every country, every industry and every business – but not evenly and probably, not rationally. Customers everywhere have reacted with increasing concern as the global drama has unfolded. This is closing wallets and cheque books at an accelerating rate, especially in the US where the real market flow on effects will be biggest and soonest. Spending falls will continue until calm returns and confidence can rebuild. If that happens in the December quarter, economies, industries and businesses will return to growth around mid 2009 – again, not evenly and probably not rationally. Growth, however, will be slower. A lot of wealth has been wiped out, confidence is shaken and lending practices will be tighter than was the case over the last 5 or so years. So, the finance market appears to be recovering but the real market is headed for recession. From here on, stock market results will increasingly reflect the combined effects of these other two markets. That means the real market is where to focus. |
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