Unless you’ve been hiding in a cave for the past few months, you’ll be aware that the UK – and in fact the world – is suffering from an economic downturn. The news has been full of doom and gloom, but while experts have agreed that there is a downturn, the reasons behind it and what effects it will have are often left without explanation.
So what has caused these issues – and how will it affect your business?
What’s caused the problem?
Unlike previous downturns, this one has no single main cause. Instead, several factors have combined to create a difficult economic climate.
The first factor is the credit crunch, caused largely by the failure of the “sub-prime” mortgage market in the US. Sub-prime mortgages are loans offered to customers who are at a greater risk of defaulting, and the banks sought to reduce their overall exposure to this risk by combining many sub-prime mortgages into single debt packages, and selling these on to other banks.
However, when many of these customers started getting into difficulty, these debt packages meant that banks around the world – not just in the US – were hit hard. This in turn meant that banks became less willing to lend money, producing an overall squeeze on credit for businesses and consumers – hence, the “credit crunch”.
In the UK, this has had the effect of putting pressure on the housing market, by making mortgages more difficult to come by, which means less first-time buyers and thus less demand – which, of course, tends to drive prices down. With lower prices, more consumers have found themselves unable to make a short-term profit on their houses – and many had stretched their borrowing to the limit, relying on fast-rising prices to make it worthwhile. With static or even falling prices, they are stuck paying large mortgages, with no chance of realising the kinds of profits they planned. This has lead to more belt-tightening.
Combined with the credit crunch, the price of raw materials – particularly oil – has soared over the past year. This has the twin effect of squeezing business, which either has to reduce its profit margins or increase prices, while cutting consumer spending power as prices of gas and electricity rise.
This combination of squeezed credit, increased costs to business and reduced consumer spending power is “the downturn”.
How will this affect business?
Businesses will find it tougher to maintain competitive prices at exactly the time when consumers are looking for better deals. Companies may also find it harder to get credit from the banks, although banks have – so far – largely concentrated on the housing market when squeezing credit.
What can I do about it?
The good news is that everyone is in the same boat – you and your competitors are all facing the same problems. Because the downturn has affected most countries, including almost all of Western Europe, even overseas competitors will have to be cautious.
However, there are many things you can do to put yourself in a better competitive position. Click here to read more on our Seven tips to survive a downturn.
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