Growth_0

2012: Economic boom or bust

Tim Allan on how the global economy will shift how companies communicate

Just a year ago, 2012 was marked down as a year of celebration. The narrative was that the London Olympics and the Queen’s Diamond Jubilee would combine to show Britain at its best and give an economic boost and feel good glow to the country.

2012 was also, of course, to be the year in which the recovery from the financial crisis would be in full swing. After Britain won international plaudits (even if they did not save Gordon Brown) for the course chartered through the 2008 meltdown, the new coalition government won the confidence of the bond markets for its tough fiscal stance. Many commentators, and certainly the government, hoped that the British economy would be on a strong rebound in 2012.

Now, in December 2011, prospects are looking very different. It is hard to remember when a countdown to a new year has been marked by such prophesies of doom. The world’s largest trading area, Europe, has managed to turn a relatively small liquidity problem in Greece into a full scale crisis in which the survival of the Euro is far from certain.

What is certain is that the crisis is far from over. Italy and Spain will need to borrow €590 billion in 2012 at a time when current rates are unsustainable. A credit rating downgrade for France and others seems highly likely while the European Central Bank, for fear of stoking inflation, seems averse to the buying of bonds on a massive scale. So far, there has been no big bazooka in sight.

The Euro crisis is likely to dominate the news in 2012. Even if disintegration of the Euro is avoided (a very big if), the medicine being prescribed in the Eurozone is hardly palatable. Rather than dealing with the immediate short term funding crisis, European leaders have focussed on preventing a repeat in the future. They have agreed to try to lock in German style fiscal discipline in countries which are already facing rapidly declining living standards. Combined with a private sector that is paying off its debts rather than borrowing to invest, it is very hard to see how the result can be any other than a prolonged Japanese style balance sheet recession.

So what does this perilous economic situation mean for politics, for business and for communications in 2012?

In Britain, the political debate will be dominated by the government’s overall fiscal judgement. Cameron and Osborne will continue to make the case that the government’s action to cut spending has allowed Britain to avoid the horrors of having policies dictated on a daily basis by the bond markets. Labour will continue to make the case that austerity is hurting but not working – borrowing requirements are now higher because the austerity has not stimulated growth.

Yet Labour has not yet gained the political advantage in the austerity debate. The polling evidence so far shows that Labour is not reaping the benefits for predicting that George Osborne’s policies would not work, because most people blame Labour for the country’s debt predicament in the first place. In addition, Ed Balls’s highly pertinent arguments (in my view) against the speed of the cuts are being drowned out in the public’s mind by his leader’s misguided anti-business rhetoric. Labour has a strong economic argument, but a weak overall political position.

As the cuts bite, the government will come under pressure to change course, although the remarkable resilience of the UK’s labour market will help the Conservatives. Private sector employment rises have absorbed a good deal of the public sector job cuts, with short term and long term benefits for the governing party. In the short term, the pain of austerity may be mitigated and, in the long term the government is “creating more Tories”, as Treasury advisers like to say.

For businesses in the UK, the threats from the Euro crisis and continued austerity are obvious. Concerns from some about Britain’s semi-detached status within the EU are valid but will be lost in the noise if the Eurozone crisis is not resolved. Even without the impact of a prolonged crisis, the Institute for Fiscal Studies estimates that median disposable incomes will not reach 2002 levels until 2015, a truly remarkably long period of stagnation.

The opportunities for business are less obvious but do exist.

The government is increasingly desperate to find ways of stimulating growth as public spending falls. Arguments against growth-destroying regulation probably have their most receptive audience ever. Arguments in favour of infrastructure investment are equally in vogue. As the employment data show, the government needs a private sector able to create more jobs than ever and business needs to be robust and confident in arguing its cases with government.

The twin forces of the fall-out from the financial crisis and the technological revolution will continue to change the way that businesses communicate and change the communications industry (one of Britain’s most successful exports!) as well. The financial crisis put centre stage the wider impact of business – its externalities in economist-speak. ‘We are all paying for the bankers’ mistakes’ became a popular refrain. The crisis changed forever the notion that business communication was simply communication to shareholders and the capital markets about the performance of the business. As business issues came to dominate media and political discourse, so businesses needed to justify their actions to a wider range of audiences and to change the ways in which they communicate . At Portland, we like to think that we have the skills to help businesses do that.

This shift has combined with technologies which allow much more direct communication with stakeholders. In 2012 each traditional media channel will continue to decline in reach and influence, and direct, digital communication will continue to become more important. We like to think we can help to advise on that shift too.

So, as we all strap ourselves in for the 2012 rollercoaster ride, we hope that we’ll be able to work with you on the issues you face in what will be a fascinating year.

Tim Allan is the Managing Director of Portland.