The Second Wave

OPINION: There is talk out there amongst the economists, commentators and even the politicians that we are past the worst of the recession, and on the way back up; no doubt based on some statistical economic indicator.

Well, a number doesn't make you go into a recession, and it doesn't make you come out of one either.

Anyone close to business can see that a second wave of tough times has already hit, and many businesses are close to flat-lining.

Just like a cardiac arrest, we run the risk of a full infarction if we can't re-start the economic pulse.

It's like the business pipeline has just been turned off. Many businesses have felt this in the last month or so, despite having previously gone through the year in good shape.

It's useful to understand the economic multiplier principle.

This shows that the effect of $1,000 not being spent by a customer is that the retailer has $1,000 less to pay for stock, and then wholesaler has less money to pay the manufacturer, and so on, until all systems arrest and get out of rhythm. 

Whilst this is grossly oversimplified, and, as with all things economic, the theory never quite translates into the real World. Whilst recoveries will follow, they don't always follow as expected.

This makes it almost impossible for a Government to get things right, and requires a number of things to happen in the right order and without adverse effect on other parts of the economy.

Almost akin to squeezing a balloon, where the air moves to some other part of the balloon, you just don't know which part until you squeeze.

It takes spending to jump start an economy; and if businesses have a weak Christmas, and there is no good reason to expect otherwise, then there will be a huge strain on already struggling businesses in the New Year.

And, as people stop spending, so do employers and we enter into a vicious downward spiral with layoffs and redundancies and the cycle continues.

An export led recovery is the only practical hope, and thankfully the Dairy Industry looks promising.

So if you are to have any chance of survival past the second wave; buckle down, work hard, save hard, spend wisely and ride out the storm.

Adam Davy is Managing Partner of BDO, Chartered Accountants and Advisers' Wellington Office.