Business Life: How we act in recessions

15th August, 2009

First published in Business Life, March 2009
Amidst gloomy economic news, there’s always entertainment to be found seeing what gets blamed on the credit crunch. According to one British newspaper, people are seeking inexpensive ways to have fun: sales of aphrodisiacs, designer lingerie and maternity dresses are all said to be strong. My own employer, The Financial Times, reckons that physiotherapists are in demand thanks to an excess supply of stressed investment bankers.
Whether or not these tales have anything in them, they do highlight an important truth: many products, businesses and people sail through recessions completely unscathed.
This basic truth – everyone’s different – is easily forgotten amidst all the discussion of “how we behave in hard times”. Good question, but when it comes to a recession, there is no obvious “we” – there are winners and losers.
The economist Simon Burgess has been looking at a survey that tracks thousands of individuals, returning year after year to see how they’re doing. One of the surprising conclusions is that many people are tipped into poverty when unemployment rises, not because they lose their job, but for other reasons, which can include pay cuts, reduced hours, or hard times for those who own a small business. Others – those with secure jobs or pensions – do as well as ever. Individual circumstance is determined more by luck and skill than what’s going on in the broader economy.
Businesses, of course, will still want to know what the “average” consumer will do. Here, there is good news and bad news. The good news is that when consumers suffer a temporary drop in their income, they usually try to compensate by borrowing more or saving less until things pick up. So while the size of the economy falls, consumption falls less dramatically.
But the bad news is that this is no ordinary recession: it’s one that was kick-started by a banking crisis. If the banks can’t or won’t lend, consumers can’t borrow more no matter how much they may want to. That’s the theory, and history says the same thing. Looking at previous recessions across the developed world – as economists at the National Institute for Economic and Social Research have done – if a recession is also combined with a banking crisis, then consumer spending slumps.
Intriguingly, customers who want to borrow and can’t may find the next best thing is not to cut down on luxuries but to make necessities last longer. Your winter coat, shirt or socks might be due for replacement, but they can always last another month; and another; and another. Good news for sellers of needles and thread, at least.
The challenge for businesses, then, is to work out which consumers will not buy unless there’s a bargain, and who are the consumers who still have money to burn. That takes careful marketing and deft pricing. In some ways, then, business as usual.

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