The Eurozone crisis – how does it affect us?
Recently events in the Eurozone have dominated the political agenda. The Eurozone crisis is now not just a problem on the periphery of the Eurozone, but is threatening to engulf Italy, the world’s 8th largest economy, an eventuality that would almost certainly bring about the collapse of the Euro.
Thankfully as I write this blog the strong measures taken by the Eurozone leaders appear to be restoring some confidence in the markets. The measures include the effective sidelining of the leaders of Greece and Italy to be replaced by technocrats entrusted with the task of pushing through some fairly painful medicine. Assuming the political will is there to drive through these reforms the chances of a crisis being averted look favourable.
Given the euro area represents over 50% of UK trade it is hardly surprising that the key survey data released in recent days and weeks has shown a sharp decline in confidence. However the hope must be that once the crisis in the Eurozone abates, we will see a return to the gradual increase in confidence we had being seeing up until the events of recent weeks.
Restoring confidence is key to encouraging investment
You may be surprised to read that the UK corporate sector as a whole is not suffering from a lack of liquidity (certainly for larger companies & PLC’s), indeed UK companies as a whole have reserves of approximately 5% of GDP. The key issue is a lack of confidence to invest this cash.
There are 2 means to address the lack of confidence:
The first is to rely on a general upswing in sentiment mainly on behalf of consumers. This seems unrealistic, most of the indicators that correlate with consumer confidence i.e. house prices, disposable income, unemployment rates are going in the wrong direction, or only slowly moving in the right direction. A primarily consumption led recovery is probably also bad for a number of other reasons.
The second route, which is probably the key one, is ensuring that entrepreneurs are aware of and take advantage of opportunities. Opportunities will present themselves even if the worst comes to the worst and the economy does flatline for a time. If these opportunities are acted upon this will encourage other entrepreneurs to move their own businesses forward and this will result in a gradual improvement in confidence across the economy. Professional advisors have a role to play in helping to ensure that their clients are aware of opportunities and can provide specialist advice and support to manage the risk and ensure these opportunties are taken.
There will always be winners and losers…
Amidst an increasingly gloomy economic backdrop some would say it is hard to see grounds for optimism. But the key point is to understand that an overall flat growth (or even negative growth) rate will actually be netting off substantial change, with some sectors and niche markets doing very well, with others faring worse than the average. The same applies within sectors and across geographic boundaries.
It is far too simplistic to say that certain sectors will do well and others will not because the position is more complex and we need to look closely within individual sectors. The key thing for business owners to understand is the macro trends that are likely to impact on the economy both now and in the coming years and work out how they can best position themselves to benefit from these,
The key trends impacting on the economy such as an ageing population, the need for more renewable energy, security (as demonstrated by the recent riots) and growth in online retail are all macro trends impacting on the UK’s companies and government right now, and these are just some of the areas providing growth potential. For example, renewable energy requirements for properties are already providing opportunities for manufacturing companies and construction companies, sectors that in overall terms are being hit hard by the recession.
The key challenge for entrepreneurs and business owners is to make sure they have the best chance of being one of the winners. The ingredients of success are, as always, having a sound understanding of where the business is now in relation to threats and opportunities it faces, and having a clear business plan and strategy to take advantage of the opportunities.