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Prepare for the worst

It’s no secret that the economy has been slowing down over the past few months, and the outlook for the year ahead remains tough, at best. While you’ll always find an economist to make you feel better by telling you that things are going to be just fine, the recent drip of gloomy economic data would seem to suggest that things are going to get much worse before theyget better, and that the slowdown could be protracted and extremely painful.

Take a trip down to Oxford Street in London, however, and you’d be hard-pressed to see any signs of recession. The tills are ringing just as often as they always were, the restaurants are full, and the British public are doing what they do best – pretending that things are just fine and dandy, whatever the weather.

For most people, recession is now either a distant memory or something they’ve never experienced as an adult. But if Britain ends up suffering the hard landing that some are predicting, many (especially the younger generation) are going to be in for a nasty shock. Only those who are building up their savings, making overpayments on their mortgage, and checking that they have adequate levels of protection will weather the storm relatively painlessly.

Although the corporate advisory community is just as much in danger of suffering at the hands of an economic slowdown as any other sector – as companies consider cutting back on employee benefits and some advisory services – at the moment, the changing economic climate in fact presents a fantastic opportunity. Just as shoppers on Oxford Street are still preferring to empty their pay packets into the tills in Top Shop, rather than paying down a little bit extra from their mortgage, many companies are ill-equipped for the worst, and may do well to listen to some advice about the best way to weather a severe downturn.

Although historically, recessions have in fact coincided with a drop in the levels of absenteeism – perhaps because people have a greater fear of losing their jobs as they see many around them losing theirs – there has been some evidence in recent years that this trend may be reversing. With consumer credit at record levels, mortgage costs continuing to rise and wage growth beginning to slow, the current slowdown is likely to be characterised by a large number of people struggling to keep up their debt repayments. Already, numerous surveys have charted a sharp increase in stress levels amongst employees in Britain over the past few years – principally due to increased pressure in the workplace – and as financial worries mount, these levels are certain to rise even faster. At the very least, this is likely to result in a deterioration in performance, if not an increase in the number of people being out of work due to ill-health.

This is exactly the time when companies should be reviewing their employee benefits programs, and ensuring they have adequate protection in place to protect their workforce productivity, at a difficult time. An extra investment here now could save them valuable profits later down the line.

From an adviser’s perspective, an increased focus on the wider employee benefits package now, may also help ease the pain of any reduction in pension saving – which is an inevitable consequence of a severe economic downturn. To my mind, 15 years of economic growth in Britain has generated some complacency amongst both corporations and individuals. Those who remember the last recession insist that the combination of high inflation, high interest rates and high unemployment that we had back then were what caused the meltdown. And given that we have none of those today, there’s no reason to suggest we’re about to experience anything like the tough conditions of the early 1990s.

But no two recessions are the same. The credit crunch is proving to be the unexpected factor which is pushing us into uncharted waters. The cost of preparing for the worst now is still not that high, but the cost of leaving yourself unprotected if recession does hit, will be astronomical.

James Daley is personal finance editor of The Independ


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