That was the conclusion of Kevin Logan, U.S. chief economist at HSBC, who spoke on the macroeconomic business environment at an HSBC roundtable discussion hosted by WWD in New York last month. Also speaking were Christopher Davies, senior executive vice president and head of commercial banking, North America, and Diane D’Erasmo, executive vice president for commercial banking, who spoke on apparel industry challenges.
“The economy has been expanding since last summer, but the recovery is weak,” Logan said. “The surprise is that, usually, deep recessions are followed quickly by fast recoveries.”
Logan said gross domestic product has not rebounded following the Great Recession of 2008. Typically, recessions are marked by GDP growth of more than 7 percent, but growth is currently running at around 3.5 percent, he said.
What else is different this time around? “We have an excessive level of household debt. Both households and businesses have debt,” Logan concluded. He said the debt-to-income ratio was 88 percent in 1997, but jumped to 130 percent in 2007.
“Mortgage debt is about 78 percent of total debt, and most consumers are now underwater as house prices have come down and assets have collapsed,” the economist said.
At 9.5 percent, unemployment is down from its 10.1 percent peak in October, but still distressingly high. Logan said consumers don’t expect their real incomes to increase in the coming year and, “as for getting a raise or a better job, they’re not thinking that right now.”
Also distinguishing the most recent downturn from its predecessors is the attitude of upper-income households. They usually lead the way out of a recession, but this time they are pessimistic, Logan noted. The top 20 percent of households account for 50 percent of the spending in the U.S., but this time they don’t see their wealth increasing and so are reluctant to spend.
“This segment is unusually pessimistic,” Logan said, pointing out that when these consumers do spend, they’re looking for a bargain. “Household spending is driven by the availability of discounting,” he remarked.
The picture will be further muddied as governments try to right budget imbalances, as the U.K., Greece and Spain are attempting.
“What we’re seeing in Europe we will see here at the state and local level, such as cutbacks in New York in services, and higher fees. It will occur across the nation, and we’ll hear more of that in July and August,” when many state budgets are due. “That will affect consumer incomes and attitudes and their ability to spend,” Logan concluded.
HSBC’s Davies sees the new flexibility of the Chinese currency as a possible movement into other currencies: “You’ll see the U.S. dollar strengthen against the euro and see the renminbi maybe go down.”
He expects a period of harsh austerity stretching for the next 18 to 24 months, particularly in the U.K. As for the renminbi, the future is hard to predict, particularly given inflationary pressures and costs from production in China.
On the flip side, however, U.S. companies should look to China as a potential growth opportunity for their products. “There will be a large increase in demand,” he said, “and some U.S. brands are doing a good job exploiting that.”
Davies further noted that Latin America and India provide U.S. companies “vastly better” opportunities than the U.S. market right now. He cautioned, however, that when expanding overseas, American businesses must find the right partners to help pave the way into these other countries and help them understand the local currency fluctuations and other issues.
D’Erasmo addressed a question on expanding overseas and possible receivables issues for U.S. firms. She said banks like HSBC offer receivables programs in international markets that work in similar ways to domestic factoring services. However, the bank does not provide a single global program to cover multiple overseas markets and companies must set up individual accounts in each country they work in.
She added the apparel industry has been “very slow to venture abroad,” but the time to do so is right now. Overseas businesses came into the U.S. when consumer spending here was aggressive, she stated, “but now the growth opportunities are in the emerging markets.”
Fortunately for firms looking to expand, financing has become easier to attain due to the improved financial health of most companies. “I’m sure many of you have banks crawling all over you making improper suggestions,” said Davies. “It’s a pretty liquid market now.”
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