Policies that please the electorate could hide inflationary timebomb

Sir Martin Sorrell warns the fiscal intervention that has taken place in the early part of this recession could result in galloping inflation

Stuart%20SmithLabour isn’t working… helped to unseat Jim Callaghan’s ‘winter of discontent’ government and sweep Margaret Thatcher to power in 1979 For Sorrell what we are going through resembles the conditions of the Seventies rather than the gruesome Thirties, though he does make some important qualifications. In the Seventies, Britain was a much more protected economy, now it is exposed to the trade winds of global laissez-faire; in the Seventies, inflation was rampant, now superficially it appears to be tamed; in the Seventies, the strength of the trade unions circumscribed the type of political treatment given to the ailing economy, these days that is much less of an issue.

Sorrell is in a better position than most to pass judgement on the present economic crisis. Cambridge economist, Harvard MBA, he’s also the FTSE 100’s longest-serving chief executive. And the company he leads – now the largest marketing services company in the world since the acquisition of Taylor Nelson Sofres – is the very embodiment of globalisation, the key economic motif of our times.

What Sorrell has in mind when he conjures up the recession of the early Seventies is not merely the sharp and nasty contraction of growth under Conservative Prime Minister Ted Heath and Chancellor Tony Barber in 1972-74, nor the secondary banking crisis and property bust which accompanied it, but also what happened afterwards under Labour administrations. Rather than face up to serious structural reform, they let inflation rip and were forced to negotiate a humiliating International Monetary Fund loan, narrowly averting national bankruptcy (hence his allusion to the Saatchi ad campaign earlier).

Despite his prediction of a “recovery of sorts” in 2010, it is the economic aftermath that Sorrell is concerned about.

I suggested the parallel with the Seventies might be overdone. After all, isn’t the scale of the financial crisis altogether greater this time – bordering on systemic breakdown? Sorrell countered: “So is the scale of government intervention, not only here, but across the Atlantic – with TARP, Barack Obama’s $750bn (529.8bn) relief programme, massive interest rate cuts, quantitative easing and so on.”

The problem is that this fiscal intervention is in itself laying down a store of problems for the future in the form of high inflation. To put the matter in perspective, Sorrell points out that something like $12tr (8.5tr) of government aid has now been injected into a global economy with a gross national product of only $64tr (45.3tr).

In the West, he thinks centre-left governments have not got the stomach to introduce the necessary structural reforms to cope with these ballooning deficits, as these would encompass swingeing cuts in public spending and high unemployment. Elections – a looming General Election in the UK; mid-term congressional elections in the US for instance – mean governments will go for the soft option of gradual interest rate increases and rising inflation.

He’s much more optimistic about the so-called BRIC countries – Brazil, India, China, less so Russia. “The BRICs have learned to save, while we spend. They will pull away [after this recession] and look stronger than before,” he says. It just so happens that WPP is well positioned in the BRICs markets, which account for about 27% of its business.

Similarly, Sorrell believes that WPP’s strength in two other “key drivers of growth” – new media and consumer insight justify his cautiously optimistic outlook. Consumer insight, bolstered by WPP’s recent acquisition of TNS, tends to perform relatively well in recessions since it is the least dispensable part of the marketing services budget. Eventually, Sorrell expects this part of his business to account for about 50% of revenues.

Wouldn’t certain product areas, such as automobiles and banking (to which WPP has significant exposure), be permanently damaged by the economic crisis? He thinks one of the problems with the car industry, overcapacity, is being dealt with. What it, and indeed banking, will need even more of is differentiation. Paradoxically, that could mean more, not less, marketing spend if objectives are to be achieved.

Will there be any longer-term consequences for consumer behaviour as a result of this recession? He believes there will be. Consumers will harden their attitude to conspicuous consumption as they become more cautious in their outlook. He says this is a trend that he had already flagged up last year (his so-called “throw-away iPod” critique), but which has been given impetus by recession. Interestingly, he also believes that corporate social responsibility will become more, not less, important as people face up to their responsibilities.

One other thing. He thinks the recession will precipitate a fresh round of consolidation in the agency sector. Interpublic is “looking very cheap” at the moment, and either Publicis or Omnicom may be persuaded to have a go at buying it. He also speculates that Havas and Aegis will – finally – “get together”.

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