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Making sense of stagnation

Guy Strafford
Feb 14, 2013 4:25:00 PM

Comments 16

Guy-New

January, traditionally long and cumbersome, seems to have raced by this year and to exhibit classic stagnation characteristics. The best evidence of stagnation is conflicting economic indicators. If the economy is flat, this is not actually because nothing changes. The average is a net of things improving and things deteriorating, which in this instance are cancelling each other out.


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The GDP figures released on 25 January confirmed what many feared;  that the UK economy, despite stimulus in the shape of the Olympic and Paralympic Games, showed no forward momentum at all.  A 0.3% contraction in the fourth quarter neutralized the net gain in the third, highlighted by a dismal Christmas on the high street, continuing moribund levels of inward investment and very little to excite economists about how the trend will be reversed.   On the other hand the stock market has soared forward, I suspect because some of the fears which investors had about the political climate (fiscal cliffs, euro split etc.) have not manifested themselves.

As we mentioned in a post last week, Proactive protection amid uncertain times, the reasons for the stagnant conditions are increasingly macro in nature. The London School of Economics Growth Commission last month found that businesses did find the UK's political system a real turn-off. While this might not be a surprise to many parts of the electorate, it is a finding that must resonate through the business community. We have a Government with an overtly pro-business stance, but if this does not translate to potential inward investment, then there is a hurdle that must be overcome.

Similarly, the Deloitte CFO Survey found that wider economic uncertainty is a greater hindrance to business growth than access to capital or financial performance. The onus, then, is on business leaders to find ways of circumventing the economic impasse and establish a means of delivering for shareholders whatever the conditions.

I think that the interesting element is that businesses are grappling with productivity improvements. New indicators suggest that this gauntlet is being picked up. In our arena, IbisWorld data suggests that procurement outsourcing is on the up, which points to a move towards proactively bringing costs under control. The Economist's recent Outsourcing & Off-shoring report also suggests that the American trend of bringing jobs back into the locality is growing. As we suggested last year, the difference in costs between off-shoring and on-shoring is shrinking. Productivity growth at home, which can and should be driven by the smarter use of suppliers, means that for many employers, the potential productivity benefits of re-shoring parts of the workforce are becoming compelling.

The obstacles to longer term, sustained growth, then, are large, but not insurmountable. We are coming into a new corporate reporting season, so we will be watching to see how closely shareholders analyze prevailing cost structures and how they are being managed. The debate about senior corporate pay, particularly in the light of some regulatory developments, is likely to intensify for a spell, but regular readers will know that we at Proxima believe that there is a bigger prize on offer.

With our work in North America growing, we have also been thinking about the potential differences between the corporate cost bases of UK and US companies, and how they are managed. What, if any, do you expect the differences to be?

Guy Strafford

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