Investors understand what business owners know

The Australian sharemarket dropped 2% this morning after another ugly night on Wall Street, where markets extended a seven-day losing streak, shedding over 2%.

The US debt deal might have been finally signed by President Barack Obama, but it appears that investors are suddenly getting worried about the state of the global economic recovery.

The US remains in the mire. The debt deal might have been done, but as the latest GDP figures showed late last week, the economy is barely growing and unemployment remains stubbornly high.

And now, to add to America’s issues, Obama has been forced to back spending cuts at a time when the economy needs stimulating. The US economy will right itself, but not in any hurry and not until unemployment falls to a point where consumer confidence returns.

In Europe, the seemingly never-ending debt crisis drags on. Spain and Italy are the latest nations to enter the potential bailout zone – both are likely to have to look at austerity measures at a time when the European economy is slowing.

This is a continuation of the great deleveraging that many analysts tipped would occur during the GFC. Companies, nations and households were supposed to be so shocked by the credit crisis that they would take steps to reduce their debt burdens.

But this process has been patchy.

Businesses and households have actually worked hard to reduce debt and, in the case of households, increased savings. But of course, lower spending means slower economic growth. And that in turn has reduced the ability of nations to pay down sovereign debt.

Which is why this global economic recovery is taking an awfully, painfully long time to gather any sort of steam.

Australia has been protected from a lot of this – thanks mainly to our mining sector riding the still-booming Chinese economy – but we’re not immune.

You only need to look at the sharemarket today or yesterday’s decision by the RBA to keep rates on hold, which was driven partly by weakness in the local economy and partly by the bank’s concern about these global trends.

As the RBA has admitted, even it has got its growth projections wrong in the last 12 months. The Australian economy is simply not growing as quickly as anyone expected 12 months ago.

That’s the bad news. But the good news is that smart Australian SMEs are actually in a pretty good spot.

Research from groups such as PwC suggests that smart business owners did use the GFC as a reason to deleverage and cut out any “fat” in their businesses – be it costs, underperforming products or poor staff.

Profitability was actually okay during the GFC and while margins have been hit in the last 18 months entrepreneurs are not panicking (perhaps with the exception of those in retail, property and transport).

Instead, they are staying close to the customers who are least affected by these global trends. They are picking their opportunities carefully. Growth plans may have been scaled back, but they have not been forgotten.

Caution is clearly required as we wait for the consumer to get their confidence back. But running lean and staying close to the customer will allow you to spot opportunities now and as the economy finally accelerates.