• Gloom grows in Europe

The Euromoney Seminars' hotel investment conference, held this week in London, was a gloomy affair with some speakers even suggesting the downturn might last for five years.

While it is understandable that that there is concern, there is little reason for surprise – this is a cyclical industry and the cycle was due for a turn – and some of the pessimism seems overplayed.

The media is certainly doing its best to see every glass as half full when it comes to the economy. Last week, for example, the London Times ran a front page news item headlined: "Car sales crash as economy skids."

But it is interesting to note what was left out from the article. For example, in the year to date, car sales were down just 3.8%. And it did not put into context that August only accounts for 3% of car sales, making the 18% decline almost meaningless in aggregate.

The pessimistic approach is widespread.  Last month, the Financial Times ran a report headlined "Jobless claimants rise at fastest rate for 16 years". This is true, but is a 2% increase in claimants that big a cause for alarm? The same government data on which the news report was based also showed that there were more people employed in the UK than there has ever been but this was downplayed.

Total employment in the UK is now 29.5 million, and the figures showed this rose in the three months of April to June. Just to reiterate, there are more people with a job in the UK than there has ever been in history.

And it is not just the media that is sticking the boot in. Bizarrely, the UK chief finance minister, Alistair Darling, reckons that we are facing the worst downturn for 60 years – well sort of. The original article in which the quote appears has been somewhat over-egged by the retelling in other media outlets.

Nonetheless, it seems surprising that Darling puts the current downturn in the same context as other recent slumps.

A quick review of past recessions would suggest this is unlikely. Let's start with the mid-1970s. Then, Britain was the sick man of Europe and we had the ignoble sight of the then chancellor, Denis Healey, going cap in hand to the International Monetary Fund for a loan to keep the country going. We are hardly there now, even if the UK government might breach its self-imposed "golden rule" of not borrowing more than it receives, over the cycle.

The next downturn came at the start of the 1980s when Margaret Thatcher "restructured" much of the UK's industry. Unemployment rose from one million to three million.

We might be seeing joblessness rise at the fastest rate for 16 years but unemployment is just 5.4%, or 1.7 million. This was a rise of 0.2 percentage points on the previous quarter January to March. And I should stress this is not the claimant count which was 864,000 in June.

If the 1980s recession was "blue collar", the 1990s downturn was felt much more widely with "white collar" workers being particularly impacted. Like now, this recession was preceded by an asset price bubble in property, particularly the newsworthy sector of residential.

But this bubble was pricked by a collapse in underlying fundamentals – unemployment rose dramatically (that is, more than 0.2 percentage points), interest rates shot up – at one stage reaching 15% – and house prices crashed. It is hard to see things feeling as bad this time around as they did in the 1990s.

Then there is the most recent downturn -which for the UK was not even a recession in the broader economy. Thanks to the terrorist atrocities on 9-11, the situation for hotels was worse and led to a number of distressed situations, most memorably Le Meridien.

In 2001 to 2002, the UK was alone among the leading economies in not going into a recession. This time, it looks like the UK will see negative growth, but only just. And for hotels, the atmosphere is arguably better.

The spectacular demand drop-off after 9-11 reinforced the stereotype of hotels being a cyclical investment. This time around, the decline in demand has been gentle.

It will quite possibly go as deep but the perception is not one of hotels dropping at a rate that is worse than for other property sectors. Indeed, thanks to the financing taps being turned off early, new supply has been constrained and trading is holding up.

At the same time as we moderate the doom and gloom, we should not be lulled into thinking that this will be a short-term blip.

The latest economic numbers coming out of Europe look bleak. The European Commission's Interim Forecast, put out this week, said that in the second quarter the economy of the EU contracted by 0.1% and for countries in the Euro area by 0.2%.

The EC radically revised down its growth forecasts, with the UK and Spain both having particularly significant revisions. Overall, the year-on-year growth rates have been slashed a full percentage point for the fourth quarter since the forecast put out in the spring. The EC remarked that this is a sharper than expected slowdown.

The outlook remains unusually uncertain, added the EC. It is most worried about the corrections in the residential property and construction markets.

Perhaps the most helpful way of looking at the current situation is to regard the three years leading up to the summer of 2007 as an aberration. We have now returned to normality. The more seasoned investors already recognise this.

The immediate challenge is persuading people to adjust to the fact that it is back to how it was four years ago. All other things being equal, more expensive debt that requires more equity to support it means asset prices have to adjust markedly.

The real danger comes not from the deterioration in the underlying economy, but in the current stand-off between buyers and sellers. The longer this inactivity lasts, the worse will be the outcome for sellers. And the worse will be the outcome for the hotel industry overall.

Share →