Wisest businesses can benefit from a bad Christmas

'Slow-downs create opportunities. Assets can be bought at discount'

Will this Christmas be different? Last year everyone who hadn't yet got one wanted a mobile phone for Christmas. Last year everyone tried to shop on the internet to avoid Christmas queues. And last year everyone was happy to spend and spend.

Will this Christmas be different? Last year everyone who hadn't yet got one wanted a mobile phone for Christmas. Last year everyone tried to shop on the internet to avoid Christmas queues. And last year everyone was happy to spend and spend.

You might quarrel with that gross oversimplification of last year's Christmas experience and you would be quite right. But you see the point: last year there was little doubt about the willingness of consumers to maintain economic growth through the early part of the forthcoming year. Some of us had worried (wrongly) about a hangover following the Millennium parties. But there were few doubts about Christmas itself and given the lags in the world economy, a good end-of-year season would have carried through well into the New Year.

Now things are less clear. The collapse of the share prices of hi-tech companies everywhere, coupled with an evident more general slowing of the world economy, means that confident consumers will be the key to growth next year. If consumers keep spending growth will be adequate. If they tighten their belts every business in the land should expect a bumpier ride. Christmas shopping is discretionary shopping and as such gives an early indication of any incipient change of mood.

There are two particular ways in which things are different - or at least may be different. One is the near-saturation of hi-tech kit, the other the increasing downward pressure on prices. Kit first. During the past three months most personal computer companies have been reporting a sharp fall in the growth of sales. Sales in most cases are still rising, so this is not a slump. But when an industry is geared to double-digit increases in production it finds it hard to adjust to more normal growth.

In addition, that other focal point of the new technology revolution, mobile telephony, seems also to be shifting from a booming market to one of more modest growth. The failure of WAP-enabled phones to ignite consumer interest has been disappointing, and the financial markets and the banks have become concerned about the funds the phone companies have to commit to develop the third generation mobile phone networks. They cannot back out of this, given what they have paid for the licences. So if we don't buy new computers this Christmas or don't take out more mobile phone accounts there is a problem.

The downward pressure on prices is partly associated with the hi-tech boom: one of the reasons why people plunged into the new technologies was because their prices were falling fast. But there is a more general process of deflation taking place. Though the retail price index is still creeping upwards, that is the result of higher goods prices and housing costs; the price of goods in the shops is actually falling. Retailers find they have no pricing power: they can shift goods but only if they are keen on price. So they have no way of covering mistakes, as once-confident companies like Marks & Spencer have discovered to their cost. This changes the relationship between buyer and seller. In a world of inflation buyers had an incentive to buy early because prices would be higher later on. Now they have an incentive to hold off because they know they will be lower. In Japan, where retail prices are falling by more than 1 per cent a year and shop prices even faster, this phenomenon has become extreme. There is little point in buying anything that you don't actually need because the longer you wait the cheaper it will become. Result: stagnation.

Looking ahead, how our consumers behave this Christmas is enormously important. If there is nothing in the shops in the electronic line to tempt us into buying, that is bad news for the hi-tech industries. If we tend to hold off purchases because we think things will be cheaper that is bad news for the business community as a whole.

So what can companies do - aside from listening to the mood music of Christmas consumers?

There is no new magic wand, just a number of old-fashioned lessons from previous cycles. Here are four. First, momentum matters. Even if it is a cautious Christmas in the shops, things will not head down suddenly. If it is a buoyant one then the economy can expect another year of strong growth; even if it is slack there will probably be good growth in the first months of the year. The problems will be later on. That gives businesses a little time to adjust.

Second, in all cycles there is enormous pressure to trim costs. This cycle is different in that there is a new tool, the new communications technologies, that can be pressed into service to this end. A simple example would be in marketing: conventional marketing requires enormous investment and involves enormous waste. Up to now e-marketing has been a disappointment. In theory it should be possible to use e-mail to sell, but in practice it has proved difficult to assemble credible campaigns. But now techniques are being developed to direct e-mails only to people who want to receive them and to create "virtual clubs" of like-minded potential buyers. Result: a new use for the new communications technologies.

Third, slow-downs create opportunities. Assets can be bought at a discount and businesses can be restructured. Indeed for wise businesses this is a moment of great opportunity, for less wise businesses are cleared out. Provided a company has the financial firepower to push through, it can establish a platform for the next burst of growth. So a "bad" Christmas actually creates more opportunities than a "good" one.

Finally, you can tell much more about the state of the economy from the mood in the streets than you can from the figures. Anyone in business will know how suddenly things go quiet, or equally suddenly things start swinging along. This happens at all times of the year. But at a retail level, Christmas matters most. Consumption is more than 60 per cent of GDP and this is the great season for discretionary consumption. Another three weeks and we will know much more about the economy next year.