News

Will 2008 be remembered as the year during which it all went wrong? It's becoming difficult to find anyone with anything good to say about the prospects for the UK economy over the next 12 months, and for that matter the rest of the world looks to be in a bit of a parlous state as well. The US economy seems destined to sink yet further, and analysts are now beginning to address themselves to what is likely to happen in China after this year's Olympics, thereby disrupting the sleep patterns of  anyone with money tied up in the People's Republic.

In December 2007 manufacturing orders in the UK fell to their lowest level since early 2006, and on 2 January 2nd 2008 the price of a barrel of oil romped past $100 for the first time. In sum, we hope you enjoyed 2007 because fun in 2008 looks like being a rare commodity. In fact if you're involved in road transport 2008 looks like being a deeply unpleasant year. Trucks are only earning when they're moving things around - we say earning rather than making money, because operating margins within some sectors of the UK road haulage business are now so low as to render the notion of profit in any traditional sense more-or-less null and void.

But for trucks to have something to move around there has to be the demand for that same something. And if the UK economy does take a precipitous turn for the worst, then demand for transport services will diminish accordingly. In fact now we're now all joined at the hip in the global  economy, what happens overseas will also influence the fortunes of the UK transport business over the next few months. About a year ago the US financial sector woke up to the fact that just because someone had the ability to walk through the door of a bank, and sufficient hand-eye co-ordination to make a mark at the end of an agreement, they didn't necessarily have to be a safe bet for a mortgage. Over 17% of those mortgages were in default by more than 90 days.

"They won't do that again," we thought, and turned on the news. At which point a new set of acronyms entered the popular vocabulary, and we were assailed with bad tidings concerning CDOs, MBSs and SIVs. It soon transpired that a fair proportion of the value of these mortgages could best be expressed in terms of magic beans. Before we knew it, entrepreneurs were flogging over-priced cups of Nescafe to the queues waiting outside branches of Northern Rock to withdraw their savings, and over half of new credit card applications were being refused.

The credit squeeze could have mind-boggling implications for the global economy. According to figures published by The Economist, US mortgage default could approach $300m. That's a lot of money to lose behind the sofa cushions in its own right, but it pales into insignificance when put up against a warning from Stern Business School's Professor Nouriel Roubini - he fears that the $300m could have been used to secure 100 times that amount. The killer here is that we just don't know where this is going to end this is pretty much uncharted territory for the global economy, so trying to extend its full impact into the UK economy, and, by extension into the transport business, is not easy.

What we can say with some confidence is that consumer spending is likely to fall, probably quite spectacularly, and if people aren't buying things off shelves, then trucks aren't needed to replenish those shelves. For the past few years consumer spending has been driven by access to cheap credit. Why save for tomorrow when you can have today has been the mantra of the British consumer, but 2008 looks to be the year that this philosophy is blown out of the water. Here's a worrying statistic: the UK has the highest level of personal debt in Europe. In fact, what we owe amounts to just under one third of all consumer debt within the EU.

This is an uncomfortable situation which is not helped by the two million or so households currently holding discounted mortgages that are likely to move to higher rate, variable mortgages during 2008. To put this into some context, the Council of Mortgage Lenders (CML) warns that repossessions might increase to 45,000 by the end of 2008 - an increase of 50% on 2007.

In sum, UK disposable incomes are likely to fall during 2008, imposing further downwards pressure on consumer spending. Just for good measure, the very thing that those cheap mortgages were taken out to buy - UK property - is now looking wobbly. In a poll of economists undertaken at the end of 2007 by the Financial Times, Professor Willem Buiter from the London School of Economics (and a past member of the Bank of England's Monetary Policy Committee) suggested that house prices could drop by as much as 30% over the next two years.

So we have a position in which UK consumers are becoming aware of increasing debts and a fall in the value of their single biggest asset - their home. This is not a situation that offers much by way of a roseate confidence in the future. Disposable incomes are likely to be falling as mortgages becomes more expensive, and the likely result of all of this will be a concerted effort to reduce debt, rather than to incur more. For some people, this isn't going to work KPMG is predicting that levels of personal bankruptcy within the UK will rise from 110,000 during 2007 to over 130,000 in 2008. Every pound that goes to reduce that MasterCard debt is a pound that doesn't go into the economy, so demand for goods drops. Ultimately, demand for the services of trucks, and, eventually, for the trucks themselves, cools off.

From this perspective it would seem that the demand for road transport during 2008 is going to be less rather than more. So much for the demand side of the equation what of the supply - what will 2008 bring in terms of the costs of operating a truck in the UK? Despite the best efforts of any number of groups, there seems to be no likelihood of fuel prices being reduced in any significant sense. A wager on next Christmas being white, and Elvis presenting the Queen's speech while sitting astride Shergar would seem a more positive investment.

The price of a barrel of oil will fluctuate but there seems to be no political will within the United Kingdom to reduce the tax burden placed upon the fuel we rely on. Operators might have become used to paying the price what they're probably not so used to is a falling pound, potentially a very serious issue of the next few months. The Bank of England's decision to cut interest rates during the second half of 2007 was welcomed by most pundits suggest the headline rate will fall to 4.75% by the third quarter of 2008. But there's a downside to this. At the time of writing sterling is at its lowest value ever relative to the Euro.

Were the UK still a manufacturing-based economy this would be cause for some cheer as UK exports become cheaper to Eurozone consumers - our biggest single set of trading partners. But we're not, so the real risk here is one of inflation. If the cost of our imports rises so will inflationary pressure. From the perspective of the truck operator this creates a double-whammy of falling consumer spending and rising costs. Truck manufacturers price their products in Sterling within the UK, but report back in Euros. So as the pound slides against the Euro (which it is predicted so to do by up to 5% over the next 12 months) trucks will cost more.

On a level playing field UK-based operators might have been able to look forward to being increasingly competitive against their European counterparts sadly, we suspect that this will not prove to be the case. Continental-based operators will still have a marked cost advantage even with the strength of the Euro factored into the mix. The net effect will probably be that the few remaining UK hauliers operating on the Continent will simply have to pay more for their fuel and road tolls. If inflation rises too far in advance of the government's 2% target, the tried and tested method for reeling things back in is to ramp up interest rates. Reversing the current trend in lending rates with an economy in decline would inevitably have a negative effect.

There's now little doubt that the UK - and probably a fair bit of the rest of the world - is now heading into at least some level of recession. We've had them before, we'll have them again, and so - well, so what? The so what in this case is the growing prospect of 'stagflation'. A combination of stagnant economic growth coupled with rising inflation characterised the UK economy during the mid-1970s and the early 1980s inflation hit 27% at one point, and things were not good. At present, the S word is only being whispered, but those whispers are getting louder. In a global economy, what happens over there ultimately impacts over here. You can, should you care so to do, trace the pounding that the Brazilian economy received during the late 1990s directly back to the Thai government's decision to mess around with its currency, the Baht.

In economic terms we are all now one big family and, like most families, occasional happiness is tempered by periods of marked dysfunction. The great thing about forecasting is that by the time one is proved wide of the mark, those forecasts have been read, discarded, used to line the parrot's cage and ultimately forgotten. In a year's time, we may have been proved right and we could be in the middle of the worst economic and trading environment for close on three decades.

How real a prospect this is remains uncertain, and proof or otherwise remains almost impossible to produce in absolute terms. So 2008 might be a bad year it could be one of the worst on record, a year that economists refer to with almost quaint simplicity as a "correction" which impacts upon just about everyone with a stake in the UK economy.

On the other hand, it might not be.

One of the few factors in our favour is that the UK haulage business is used to being done no favours by its operating conditions. Of all industries, it is probably the best trained in terms of weathering whatever storms will head our way over the next 12 months.