As start-up entrepreneurs arrive at work after the most dramatic few days since the GFC, they are likely to have two key questions on their mind: What the hell just happened and what happens next?
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The financial markets have finally woken up to something that entrepreneurs have known for at least 18 months – that the global economic recovery is patchy at best and anaemic at worst.
In the United States particularly, financial markets have been relatively strong in the last two years. While the US economy is frankly stuffed, corporate profits have actually been pretty strong because companies have slashed costs (that is, they cut jobs) and rebuilt sales. Those strong profits have helped support share prices in the US and allowed investors to think the recovery was under way.
But the events of the last few weeks have shown investors around the world that the recovery wasn’t really happening. The political crisis over the US debt ceiling was one problem, but GDP figures released as the politicians squabbled were just as alarming – the US economy grew at just 1.3% in the second quarter after growing at just 0.4% in the first quarter. The latest unemployment figures (released last Friday) also showed the jobless rate is still above 9%. And the plain fact is that the jobless cannot spend.
It was a combination of these problems that led ratings agency Standard & Poors to chop the US from the coveted AAA rating to AA – with a negative outlook.
When the US markets dive, markets around the world follow. But global markets aren’t just blindly following the US – there are plenty of other problems outside of the US to contend with.
In Europe, the seemingly never-ending debt crisis drags on, with Spain and Italy last week joining Greece, Portugal and Ireland on the bailout-or-bankruptcy list.
In China, questions remain about how strong the economy really is – and whether the 9-10% growth of recent years can really continue.
And in Australia, we’re dealing with the fallout of all of these issues and more. While our sovereign debt levels are low and our exports are booming thanks to the resources industry, poor consumer and business confidence and the impact of the high Australian dollar have many suggesting that certain sectors – retail and building are two obvious ones – are in recession.
What happens next?
For a start, we should expect plenty of volatility on sharemarkets in Australia and abroad, and potentially more ugly falls.
It’s important to note that markets haven’t even had a chance to react to the news that the US has been downgraded yet – this was announced after the US market closed on Friday evening, so the Australian market will digest the news on Monday and the US market will deliver its verdict overnight on Monday.
It will be a few weeks before we have official measures of business and consumer confidence, but expect both to take a big hit from this latest crisis.
Consumer confidence plunged by 8.3% in July to levels not seen since the GFC, so we should expect to see households retreat even further into their shells in the next few weeks as they suddenly find themselves feeling poorer.
Business confidence took a hit in January due to the floods and has really remained stuck ever since. The resilience of entrepreneurs and managers will be sorely tested now.
Further falls in confidence are clearly bad news for both B2C and B2B businesses.
Are recessions likely?
However – and this is very important – recession in Australia is extremely, extremely, extremely unlikely. Recession in the US is also unlikely.
But growth will be slow in the US and Europe for a long time, as unemployment remains high and governments are forced to deal with their massive debt burdens.
In Australia, the situation remains patchy. Note that on Friday the Reserve Bank of Australia cut its growth forecast for calendar 2011 from 4.25% to 3.25%.
However, it wasn’t all bad news – the Bank also raised its forecast for the 2011/12 financial year by a quarter of 0.25% to 4.5%.
This serves to underline that the economy remains in decent shape here. For example:
- Our unemployment rate remains very low at around 5% and is unlikely to rise.
- Our sovereign debt is low, our budget deficit is small and our banks are in good shape.
- People have been saving, so household balance sheets are actually in much better shape than during the GFC.
- The outlook for economic growth in Australia is much, much better than around the world.
How do start-ups react?
Firstly, don’t panic. The world is not going to suddenly end and this is not the time for rushed, poor decision-making.
It’s also important to realise that most of Australian start-ups and small businesses are in pretty good shape to withstand this sort of shock. The lesson of the GFC – that is, debt kills – has been well learned and most small businesses will have taken a reasonably cautious approach to expanding their business. In many businesses, overheads will be reasonably low and debt levels should also be manageable.
The first practical thing to do is hit the phones. Call suppliers, investors, mentors, advisers (such as your accountant) and get their impressions of the market.
Get a sense of how your sector is travelling BEFORE you call customers armed with this intelligence.
While you don’t want to do anything that puts your business in any danger – like suddenly extending your payment terms or working for nothing – it is important to be flexible enough to react to any changes in customer behaviour.
Cashflow is likely to become even tighter in the coming months as consumers and businesses hold onto their cash for as long as possible. Start-ups need to be particularly vigilant about late payers – offer discounts for early payments if necessary and jump on overdue debts immediately. The phone is your friend in this situation.
When it comes to finding new customers, knowledge is power. Consider which potential customers are most exposed to global growth headwinds and which are better placed to benefit from positives trends such as the mining boom, the ageing population and population growth in certain areas.
Pick your growth opportunities carefully and be prepared to step up. Customers are going to need convincing before they spend and you need to be ready to show that your business can offer the service, customisation and flexibility they need.