The period leading up the credit crunch is now widely known as the Great Moderation, a period that started in the 1980s and saw a sharp reduction in economic volatility. The collapse that followed in the autumn of 2008 is often referred to as the Great Recession.
We are now exiting the recession and heading into recovery. But this third period does not look like the recoveries we have previously seen following downturns in that it is much shallower (at least for most Western economies). We should perhaps dub it the Great Grind.
There are a number of notable characteristics for the Great Grind. Firstly, it is a period of fiscal tightening. We have already written at length about the impact of rising taxes and public spending cuts on the hotel industry. In particular, Otus & Co has produced an insightful analysis of the impact (see Volume 6 Issue 2).
These cuts and tax increases are only now beginning to bite and thus impact on hotel demand. In addition – the second characteristic of the Great Grind – monetary tightening is also starting. The rate rise in early April by the European Central Bank to 1.25% from 1% is the most marked move by the major central banks.
While it seems unlikely that the US or UK central banks will follow this lead in the next few months, most expectations are for interest rates to begin rising by the end of the year or at least in early 2012. And it seems highly unlikely that the stimulus provided by quantitative easing will be extended.
This is a twin pronged attack on consumers. Real household incomes are now declining, the first time in 30 years in the case of the UK according to the Office for National Statistics, and this is before the full effects of fiscal and monetary tightening are felt.
There is some good news for the hotel business in that the Great Recession has seen remarkably little corporate distress. Most corporates are emerging with strong balance sheets and an appetite for growth. Given that it is corporates rather than individual consumers that are the source for most hotel demand, this gives some hope.
There is also encouraging signs that the period of amend and pretend is drawing to an end. Weak businesses that should have been put out of their misery have been kept on life support by banks who were too fragile to take write-downs on their lending to such enterprises. The tightening monetary policy will only accelerate this trend.
PricewaterhouseCoopers, in a document produced in April for its Portfolio Advisory Group called "European outlook for non-core and non-performing loan portfolios", estimated that European banks have Eu1.3 trillion of non-core loans.
PWC makes the point that dealing with this overhang will require a massive level of transactions. And yet so far, there have been few. In fact, for the vulture funds that have been set up to swoop, far too few.
The first barrier to deals identified by PWC was the bid-ask spread. Banks have been unable to sell at the price buyers are willing to pay because of the impact of the write-down on their balance sheets. But PWC also makes the point that the process takes time due to the complexity of many loan books. The expectation of PWC is that it will take, "at least", another 10 years for the deleveraging process to complete.
And where is there the most pain? In total quantum it is that economic powerhouse and paragon of financial virtue, Germany. A whopping Eu225bn at the end of 2010 on PWC figures. Next up is the not surprising appearance of the UK at Eu175bn. Spain and Ireland also have big problems with Eu103bn and Eu109bn respectively.
Of course, all these mega numbers are much wider than the hotel industry but buried in the figures are some significant hotel portfolios across Europe. And the fundamental point is that the list of reasons for doing a deal is getting longer, while the list of reasons for not doing a deal is getting shorter. In particular, rising interest rates will add significant pressure.
During the period of the Great Grind there is unlikely to be much opportunity to grow out of trouble. The latest World Economic Outlook from the International Monetary Fund is testament to just how bleak growth prospects are for most Western economies.
The WEO released in April forecast growth this year of 1.6% in the Euro area (even Germany was a below trend 2.5%) and 1.7% in the UK. Next year it is little better at 1.8% in the Euro area and 2.3% in the UK.
The Great Grind will be a period of difficult deal doing but the deals will have to get done.
*This is the comment piece in the latest print version of Hotel Analyst which is now available on the website and will be with you in print form in the next week or so.