Chairman's update Vol.2
We are now entering the tenth week of lockdown in the UK. As politicians tried to cope with the panic created by the pandemic, the world’s economy has shut down following the measures put in place to deal with it.
We are beginning to understand the human cost of the disease, which is now so widespread it has affected all countries. The consequences of shutting down the economy will be seen in the coming months and the longer businesses stay shut, the worse that toll will be economically and mentally for many businesses owners and employees.
Although furloughing has been fantastic, ensuring that people unable to work have still received a wage, many of their employers have accumulated debt whilst closed and will have a cash flow crisis when they restart. Rates and rent loan interest have also been building up. Companies may well crumble as business owners realize that they can never repay what they need to borrow in order to start up again.
For those companies which can restart, it will be a slow, hard process. Every business requires various inputs – for example, manufacturing, services and many other organized activities – and if one part of that supply chain has been disrupted, they cannot function until they have sourced an alternative supplier.
These days, supply chains have become global, and even electricity is dependent on grid systems across countries along with data processing. Multi-nationals have faced criticism recently for moving manufacturing around the world. This ignores the benefits of lower prices that everyone has enjoyed and the countries supplying those manufacturing services have seen improved living standards as a consequence. We are at risk now of seeing a global rise in the price of goods if countries restrict imports and politicians insist on arguing over trade negotiations. We should also expect to see shortages in the future of raw materials as mines have had to close and oil drilling has practically stopped. At Harwin we have been preparing for disruption by building stock levels of materials, doubling our normal stock holding.
Central banks always seem to use lower interest rates as a band aid for any economic problem. Current interest rates are practically zero and our government, along with Japan and Germany, is borrowing at negative rates. Businesses do not typically change their investment plans if interest rates have moved by a marginal amount though. If you look at Japan’s experience, you’ll see that lowering interest rates actually increases savings and only has a minimal effect on investment. And very low or negative interest rates also damage pension funds, the insurance industry and banks.
I’m asked frequently whether I think our economic recovery will be ‘V’ shaped or ‘U’ shaped. My opinion is that, it will be a wavy-shaped recovery resembling a series of ‘W’s as imbalances are smoothed out. If the politically driven re-shoring of manufacturing is to happen, it will be hampered by the lack of skills required in western economies, and will require real change in the way students are trained in schools and colleges.
Damon de Laszlo
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