A steady(ing) shade of gray

Stehen Booth is the managing partner of PwC, one of the top professional services firms in the country. PWC recently issued its 10 Commandments for handling the economic crisis. In this interview, Booth discusses how he and his clients view the next months, and what, if anything, the government should do to assist business in revitalizing the economy.

*Q: When you talk about the big picture with your clients, what colors are using to describe it?

A:Well, we are in the middle of a gray period. As late as last September, business had a much brighter view: in our GDP consensus tracker, the general opinion is that the country would still grow at a 5% clip. That has obviously changed: in March, the consensus was that the economy would shrink 2%. While that view is certainly darker than last year, it is much brighter than what people believe will happen to our neighbors.

Central Europe: 2009 GDP Growth Forecast
(Source Eastern Europe Consensus Forecasts, Consensus Economic Inc)

*Q:We were over-optimistic in the fall. Any chance we are being too pessimistic now?

A:No, I think the consensus view is just about right. Our economy is too closely linked to Germany to avoid any fallout from its troubles.

*Q:Companies tend to pass through three stages when facing a crisis: denial of, reaction to, and exploitation of new conditions. Where on the continuum are we?

A:We denied reality a little longer than many other countries. That meant it took a little longer to act effectively in response to what was happening in the market. Now, however, I think we have hit an equilibrium stage. Companies have cut back the fat in their organizations, have taken the hit to the revenue side, and are ready for whatever comes next.

*Q:What does come next?

A:That is a dangerous question to answer. I cannot see things falling apart, but it is hard to say when growth will begin again, and the velocity of that growth will probably be less than it was in the last few years.

Even if we do have another shake-out in the next months, we are in a pretty good condition to withstand it. The government has the firepower to spend our way out of it, and our banks are strong domestically.

*Q:So far, the government has resisted any calls for a stimulus package. Will they be able to hold their ground if the economy gets any worse?

A:That is hard to predict. Until now, business people have not really demanded increased government spending.

*Q:And is that because business does not want it or because business has such low expectations of what the government is capable of doing?

A:That would be interesting to know. Whatever the reason, I think the pressure on government to spend more will grow if the economy gets into deeper trouble than today. I am not exactly sure what the government can do to help; the problem is mostly due to lack of demand in foreign markets. If the government does change its mind about spending, however, its low debt levels will give it more flexibility than its neighbors. That is a result of good financial management by a series of governments.

My sense is that we are going to get through this sooner than we expect. I expect that we will have to fight through 2009, but that the economy will gain traction in 2010 and begin growing again. And when the recovery comes, the Czech Republic should emerge first and grow faster than the other countries around it.