Monday, 5 January 2009

The Sun Also Rises

2008 is a year that most people will be glad to see pass into history. Whilst some will have fond memories of 2008 – the supporters of Barak Obama spring to mind – it is likely that the economic downturn will dominate our collective memory of the year. At this point in the cycle, it might seem that no good news is on the horizon. Indeed, a number of our correspondents have specifically asked for good news stories because they are in short supply at the moment. As it happens, something positive did happen just before Christmas, which gives me a sense of hope for 2009.

One of the services provided by our consulting arm – The Greenways Partnership – is a telephone advisory service. What happens is that executives from multi-national companies call us to have a conversation about some aspect of the future that affects their business. Normally we chat on the telephone for an hour or two, sometimes with an agenda, more often without one, and we talk around the issues that concern them, to which we provide a futures context. Like most consulting, there is a ‘going rate’ which the market bears.

At the beginning of 2008, the going rate was $250 an hour for a conversation to a US company. By December 2008, the going rate had fallen to $200 an hour for telephone advice. The impact of the recession in the US had cut the standard rate by 20%. However, another element has to be factored in that leaves me hopeful for 2009. In January 2008, with the exchange rate at roughly $2.00 to the £1.00, the $250 an hour translated to £125.00 an hour. By December 2008, Sterling had fallen against the Dollar to about $1.50 to the £1.00, which meant that my $200 an hour was now worth £133.33, a 6.6% fee increase!

This story extends right across the UK economy and applies to all of those businesses that have an overseas income stream from a variety of locations. For example, as the Chinese Yuan, a number of other Far Eastern currencies, and most Middle Eastern currencies are pegged to the US Dollar, exporting to those economies has just become that much easier. Additionally, the fall of Sterling against the Euro (roughly Euros 1.40 to £1.00 in January 2008 falling to roughly Euros 1.00 to £1.00 in December 2008) will make UK exports to our largest trading partner that much easier. We can reasonably hope that an export drive in manufactures and business services will help to pull the UK economy out of recession in 2009.

There is, however, more to be said than just for manufacturing and business services. The falling Pound creates an opportunity for the UK Hotel and Leisure Sector to position itself to sell to US, European, Far Eastern, and Middle Eastern tourists. The anecdotal evidence reaching us at present suggests that the surprising buoyancy of retail sales just after Christmas was helped greatly by European tourists who now find London such an inexpensive retail experience and so accessible by Eurostar. One correspondent informed us that, just after Christmas, there were large queues for entry to Westminster Abbey and that most of those in the queue were European tourists.

Of course, as Sterling falls against a basket of currencies, not only do prices in Sterling fall to foreigners, but also prices in other currencies rise in terms of Sterling. One of the reasons why the price of oil has fallen by two thirds and yet UK petrol prices have only fallen by a third is that oil is denominated in US Dollars and that the Pound has fallen back against the US Dollar. The inflationary pressure one might expect from a fall in the value of Sterling has been kept in check by the weight of competition in an economy that is sliding into recession. As long as this happens, the UK is likely to stay an attractive destination for overseas visitors.

The world of finance is zero-sum – every credit has a debit. If our fees have risen by 6.6% in terms of Sterling, if our clients are paying 20% less for our services in Dollar terms, if the UK is such a bargain for overseas visitors, then who is making the losses that match these gains? This is a rather vexing question. In part, the banking sector will be suffering from reduced volumes of business, but we need to look elsewhere for the capital losses. Strangely enough, we are developing an hypothesis that suggests that the main losers who are paying for our good fortune are those economies that ploughed their trade surpluses into the US financial sector. As the US financial system starts to shake out its losses, we are, in effect, seeing a de facto wealth transfer across the Pacific. Only this time it is shifting from East to West. This is a subject to which we shall return in the weeks to come.

In the meantime, from the perspective of the UK, we can be hopeful for 2009 if the potential for an export drive comes to materialise. All of the benefits of the revolution in ICT of the past twenty years now mean that the UK SME sector can compete at the global level. Let us hope that owners of small businesses in the UK have to self belief to just go and do it. If they can, then we may well find ourselves coming out of recession in 2009.

After all, the sun rises as well as sets.

© The European Futures Observatory 2009

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