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Key Issues

Recruitment in the financial sector- an economic outlook

Tightening our belts
Being the slightly overworking, overachieving, never resting type, my manager suggested that I finally take holiday time to relax. So this month I took off a week to go back north to sunny (or not so sunny!) Leeds. Sitting with my father, we started to talk about the household budget. After 30 minutes debate about whether it was worth tightening our belts in household expenditure or awaiting the real outcome of the economy and our investments, we decided to do both. Out came the budget (my father being an accountant, it was written up in true format) which I was to critique.

“Food spending – surely you can cut here.”
“Electricity bill – they are ripping you off!”
“Mortgage loan – yikes!”
…and so it went on for several hours.

On finishing up my father pondered for a moment, turned to me and then asked how the economy slowdown might influence recruitment in the coming months.

And my week of relaxation was over as I now had a task to research – which goes as follows…

Rocketing consumer debt
As of January 2008, The Bank of England maintains that annual household debt sits at £1.175 trillion (a frightening thought given that this almost matches the UK’s annual GDP), 84% of this is attributed to mortgage accounts, the rest to credit cards, consumer loans, overdrafts. Since 2000 (rather surprising to some given the tragedy of 9/11) we have more than doubled our borrowing with rocketing house prices and the biggest consumer spending boom in UK history.

Whilst this sounds like a bleak story, my take is very different. Debt is intrinsically a bad thing only when it has no sustained return. Like the first trading economies and the development of their currencies, debt is crucial to the modern world and the complex system of lending enables the channelling of money to whoever can use it, investing in the future and returning capital to the lender. If the lender and the borrower can forecast correctly and budget effectively, there is no problem.

If we take the mortgage lending market as a cornerstone of the UK economy (£980 billion owed on mortgages) and measure it up against the UK private housing stock (£3.4 trillion), we can see that collateral far outweighs debt, a safe bet for the lender – so no problem, right?

Sadly, wrong. According to Moneyweek magazine (and every other major economics outlet) the private housing market has been horribly overvalued for a long time, prompted by the same in the United States. This means that all is well so long as house prices do not fall, so long as the cost of borrowing remains steady. If it were to falter, suddenly the asset would be worth less than the debt.

On a more macro-scale, this excess profit for the lenders thus far (overvaluing houses equalling higher costs of borrowing equalling upwards profit trends for lender) spiralled the high street boom (in unsecured loans and equity withdrawal from this overvalued property), expanding outlets and stocks on offer without needing to pass on the cost to the consumer.

Suddenly, the consumer stops spending since his/her assets are worth less than debt. At the same time, the lender slows providing for the high street because its assets too are worth less than their debt. The result? Economic slowdown.

According to the Experian poll, 32% of people are expecting to reduce their debt as opposed to 11% who intend to increase it. If this is the case then the consumers’ intention to save is at its highest since 1997 and the slowdown is impending.

The reality of recession
A technical recession occurs when the level of real national output declines over two successive quarters causing a contraction in the total volume of production in the economy. Often a sharp slowdown in the rate of growth of output, spending and income can feel like a recession.

My point? There is no recession! The talk of recession is a psychological issue of mindset. The last two quarters have shown a slowed growth but not a halt and certainly not a decline. Having the science bit out of the way, I now feel confident in maintaining my view that recruitment will continue steadily.

It is most likely that the US based firms will spend less heavily since they have an asset crisis back home, plus a UK based slowdown. These same firms will scrutinize their own budgets more heavily and the most important qualitative asset will always come out on top – the employee. Particularly in the case of accountants (who are a necessity in realising both the successful as well as negative trends occurring within a company) the budget for staff traditionally holds out.

Companies at large will continue to expand at a slower rate causing a need for long-term minded staff, a greater loyalty. This may mean taking on board two part qualified staff who want to learn and progress instead of one fully qualified employee. I have already experienced this in a number of cases.

European based firms will be very similar to the above but they will be consolidating any secured assets they have presently as opposed to any lost assets as above.

The future is brighter than you think
Whilst these larger firms will lower volume of recruitment and increase qualitative levels, I also hold firm that the smaller companies will be given the greatest opportunity to further their commercial prowess. They tend to have lower debts due to a lower asset count and will (going forward under the latest budget) be given more government assistance and cheaper loans. Through this mechanism I expect a steady growth from this end of the market.

The overall picture of the graduate recruitment market has not changed all too much – it just takes a little more time. As a candidate the advice is simple: not to panic but to consider other options as normal so long as right for you; know that like a budget you must continue to have a career plan and that companies do still hold out the budget for the right talent.

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