The big business - part 2

We are now officially in a technical economic recession. Although with the rising costs of fuel and food we have all known this for a very long time.


And we all know now that an economic recession is six months worth of negative growth - right? We also know that growth is represented by the change in GDP in the last three months (a quarter) - right? And GDP is usually measured by the equation C+I+G+(X-M), where C is Consumer spending, I is Investment, G is Government spending and the (X-M) is the net exports (ie cost of exports minus the cost of imports) - right?

I mean business reporters seem to have great fun in quoting economic terms like GDP and negative growth and the like, so we all know what these terms mean, right? Yet there are so many people out that are happy to stick their heads in the sand. They say "Why do we need to borrow and invest in our infrastructure? Sure we are in a recession and that means we have had two quarters of negative growth, but we will be fine wont we? I mean we have experienced good times in the last few years and our economy has been thriving. Isnt that enough?"

Well in short no.


If we are spending less, ie our GDP figure is down from six months ago, then that means that businesses are receiving less cash, which means that they will have less cash to pay their bills. And guess what - which business expense is the easiest to cut when hard times hit? Savings made by cutting overheads will limited, because although there are components of overheads that are variable the major costs remain fixed. The lease still stays the same and cutting back phone calls and turning off lights is a long term plan and not to mention a hard road to make the necessary savings. The easiest way to make large savings is by cutting employee numbers.


Take the media industry for example and more specifically the newspaper industry. Businesses have already started to cut back on variable costs and we are seeing a drop in advertising sales. With this decrease in a newspaper's income stream that obviously means that there is less money to put that paper out. And sure they can cut back on mobile phone calls, buying columns, paying for outside photos etc but really these are just stop-gap measures. Eventually the numbers of staff will need to be assessed.


In the last couple of months Fairfax have announced a change the sub-editing department, a cut in staff numbers across the country and a temporary new employment freeze (although apparently this has now come off). This is a recession at work.

So as to the question can we grow our economy is a way that is steady and still remain stable? The easy answer is yes we can but the problem is the economy is like a child, if we do not keep feeding it we will end up going backwards. Imagine if you thought well ive alreay committed five good years to that child I have got some time to cruise here, where do you think that child will end up in comparision to the rest of his/her peers. The economy is just like that if we do not keep investing/spending then we will lose any ground we have made and then if left to continue the economy will spiral downwards until hyper-inflation, high unemployment and negative growth are just a natural part of life. When there is no growth ,businesses push up their prices to make a profit, but then staff demand wage rises to cope with the rising costs which in turn pushes up business's costs effecting the price of goods. It is a dirty horrible cycle with very little way out - just ask the residents of Zimbawe, im sure they are feeling the pinch of 300 per cent inflation. And worse still, so many businesses do not last under these conditions and so they fold under the pressure, making their staff unemployed.

So here we are in a recession, and yes what comes up most come down and surely that means what goes down sure must come back up? But without investment to stimulate growth how do you think we are going to end up climbing back up the economic ladder, that is why they call it 'hyper'-inflation. And if we want tax cuts, which apparently we do because we are all demanding a financial break to cope with the rising food and fuel bills, then where do you think we are going to get the expenditure to stimulate growth - apart from borrowing to invest. Because keep in mind part of the GDP equation is government spending and if consumer spending is down because of the high prices, where do you think that needed stimulation is going to come from?