busiNess

Good news for the prudent: we’re heading for recession

Richard Northedge says those who did not overspend during the boom years will soon be able to buy whatever they want at bargain prices, perhaps even with borrowed money So Britain is talking itself into recession. Keep chattering. If people want a recession, let them have one, so that the rest of us can benefit from it. This is not a suggestion that cold showers do us good or that a spell of reality in the housing market is overdue; it is a reminder that when other consumers have lost their confidence, the bold can take advantage of their apprehension.

Slumps mean opportunities. When the majority are out of the market place, the brave can go there without being crushed or outbid. This is the time to be counter-cyclical. If for the past five years no builder even had time to give you an estimate, next year you will be swamped with workmen undercutting each other to win your job. Want a new carpet? They’ll be virtually giving them away to clear their stocks. Itching for a break in America? Watch the airlines slash prices to fill empty seats, even as aviation fuel prices soar.

It is not that we want a recession — a buoyant economy should generally be better for everyone — but if there is one coming, we must make the most of it. After all, we deserve it. Throughout the boom years the prudent among us held back from the vulgar rush to buy bigger sofas and Spanish time-shares, put off by inflated prices and packed shopping centres. Cautious consumers did not remortgage their homes to buy boats or holidays they could not afford, or run up credit-card bills to use tomorrow’s pay packet to finance yesterday’s purchases.

Well tomorrow has arrived. The highspenders may still have their leather-look three-piece suites but the holiday is long forgotten and the time-share apartment is all but worthless. They cannot withdraw more equity from their homes because tumbling property prices have eroded the equity. Yet the loan repayments continue and the mortgage’s low-rate period is about to end. Those who overconsumed when the economy was growing — whose overconsumption provided the growth — are now paying for it. Literally. They’ve had their time, and it’s time for the rest of us to start partying. Indeed, with inflation soaring, better to spend our savings than leave the money to shrivel in the bank. It is not the economic slowdown that is forcing people to stop spending: it is their reduced spending that is causing the slowdown. Ask Marks & Spencer or John Lewis, or those retailers that have already gone into administration for lack of trade. It does not matter that we are not yet technically in recession, which would require two consecutive quarters of negative economic growth; opinion polls show a large part of the population think growth is already negative, and if they adapt their spending to reflect their belief, then they will take us that step closer to actual recession.

The weekly news of falling house prices tells people they are less wealthy and reduces their confidence to spend; increases in the costs of petrol, heating, food and mortgages leave less disposable income for life’s luxuries; warnings of job losses intensify the sense of foreboding. It is no wonder the high street is set for summer sales that will extend into mid-season promotions, autumn events and January sales that will start long before Christmas.

Commerce has become so reliant on consumers spending every penny they have, and quite a lot of pennies they haven’t, that it is not ready for a reduction in demand. Even if companies share their customers’ gloom, they dare not admit it. Factories are loth to shut production lines, shops cannot readily reduce selling space, rents are fixed. Business models require volume and if customers are reluctant to buy, the response is promotions and price cuts to stimulate purchasing and shift stock — even at the expense of profit margins. And that means bargains for those brave enough to buck the trend and keep buying. Even the supermarkets are cutting food prices to win custom, but the biggest savings are going to be on the biggest-ticket items. If you thought kitchen manufacturers ran permanent special offers, wait for the discounts they will give in desperate attempts to attract trade. Watch how furniture companies take an axe to their prices in the same vain hope. Holiday companies will slash package deals. The price of cars — especially large, gas-guzzling ones — will tumble as they stand unwanted on forecourts.

The middle classes may not like haggling but the price of everything is becoming negotiable now. Suppliers have misjudged the market but the minority of people still prepared to purchase — indeed, those now able to acquire the big-ticket items they deferred buying during the boom — have the power. What better time to call in the decorators or have the house rewired?

And recession will mean bargains on small-ticket items too. If people are not writing large cheques because they can’t get the credit, they are also cutting back on smaller luxuries because their income is being spent on necessities. Hence hotels and restaurants come up with special offers. Even theatres sell empty seats cheaply.

Bargain seekers must be vigilant, however. The closer a company is to insolvency — and many retailers are already teetering — the deeper it will discount stock to generate cash. But the buyer must be careful not to part with money before receiving the goods or services. Where do you stand if your airline goes bust before you fly? In a queue at Stansted holding a ticket that looked cheap but is actually worthless, perhaps. Will those cut-price dining chairs be delivered before the liquidators lock the warehouse? Will your builder be back in Poland as soon as you pay him the first instalment?

Sooner or later there will be bargains on the biggest ticket item of all — property. But it will be later, not sooner. Housebuilders are a classic example of a business that failed to anticipate diminishing demand. They geared up for higher production, even by taking over rivals; their long lead-times mean they are still finishing homes they know will be hard to sell; and they have land banks that would have lasted five years at last year’s rate of building, but which will provide sites for decades at this year’s sales levels. The big builders are strapped for cash and slashing prices, offering ten-year interest-free loans on a quarter of the price, paying buyers’ stamp duty, legal fees and survey costs, and waiving the requirement for a mortgage deposit.

What bargain could be better than that? Most, unfortunately. It needs a lot more inducements than those to encourage the purchase of an asset that is likely to lose at least 10 per cent of its value over the next year. When the property market eventually turns, those builders — if they are still in business — may have cut production to meet the muted demand and withdrawn all the specialoffer incentives, but there will be good value in the rest of the market. Just wait.

The same argument applies to shares. They are cheaper than last year but why buy now if they will be cheaper still in future? For contra-cyclical buyers there are undoubtedly companies whose shares have fallen too far, possibly including some of the housebuilders and retailers, but buying them is a greater risk than snapping up their knockeddown products.

The credit crunch may be largely responsible for our descent towards, or into, recession but, ironically, some debt-laden companies see credit as their salvation. Carmakers have long specialised in zero-per-cent finance; now not only are housebuilders providing interest-free mortgages, but furnishing stores are offering zero-interest sofas to boost sales. Central-heating systems that once cost an arm and a leg now come at the price of a single limb, and the utility companies don’t want to be paid for 12 months.

Meanwhile, who do the lenders favour? Homeowners with low mortgages and negligible credit-card balances who did not overspend in the boom and who are able to buy bargains today. So why use the cash you prudently saved when you can leave it in the bank earning interest rates elevated by the credit crunch and by a Bank of England worried about the economy? Why not borrow a little spending money?

So open the cut-price bubbly and celebrate. If the economy is sinking like the Titanic, let’s go down in style. It is our duty to help those companies with high debts and high overheads that need to dump stock cheaply to the few people still willing to buy. Recession is no reason for depression.