A year of living dangerously - now global crisis looks set to worsen

Is the coming year going to be as bad as the pundits are telling us?
It may be even worse. As several projections have suggested, the UK economy could suffer a sharper downturn than other countries ­ partly because of its heavier reliance on financial services.

But, as Anastasia Nesvetailova, a specialist in global finance at London’s City University, points out, world GDP will still grow nearly 3% in 2009, in line with what the International Monetary Fund has said we should expect.

So it’s not all gloom. “I actually believe the global recession won’t be as deep as some sceptics make it - it certainly won’t translate into a global depression,” says Nesvetailova. “Although some parallels between the 1930s and 2000s ­ such as high leverage, banking and financial crises - are staggering, both national systems of economic management and the level of international policy co-ordination is much more advanced today than in the inter-war period.”

And recessions don’t always last for as long as business people imagine they will. “They tend to begin before most people realise and recover long before sentiment and confidence catches up,” argues Dr Stephen Barber, head of research at Selftrade, a stockbroking firm that is owned by the Société Générale group.

“If we look back to the recession of the early 1990s and GDP figures, we can see that recovery began within nine months of the beginning of negative growth and there were pretty healthy numbers after mid-1992 ­ and yet consumer confidence over the same period was more erratic and slower to catch up. In terms of recovery we are in uncharted waters.

“The economic cycle and the market cycle do not run in tandem ­ the latter tends to run ahead, falling into downturn earlier and recovering earlier. Within the market cycle, too, different sectors peak and trough at different times.”

How should business respond to the recession?
The issue at the top of the agenda for many FDs in 2009 will be liquidity. “Banks are withdrawing overdrafts, tightening credit, loan and working capital facilities ­ and those that remain are subject to punitive interest rates,” points out Peter Ewen, managing director at working capital lender, Venture Finance.

In this climate, there’s bound to be an increase in insolvencies during the year, he says, probably even worse than the fallout from the dotcom bubble when 20,000 firms went down the tubes.

Nick O’Reilly, president of R3, the Association of Business Recovery Professionals, predicts a 41% increase in insolvencies by the end of 2009. “This means we will start to see the numbers of insolvencies we saw at the peak of the last recession in 1992,” says O’Reilly, who is also a business recovery specialist at Vantis, an accounting, tax and business recovery group.

“Even when the bottom of the market is reached, I would still expect to see a large number of insolvencies occurring up until 2010 as the initiation of formal insolvency processes tend to lag six to nine months after signs of initial distress,” adds Vernon Dennis, head of corporate recovery and reconstruction at law firm Howard Kennedy.

But that doesn’t mean FDs should encourage their companies to go into hibernation during the forthcoming economic winter. “In hard times, it’s imperative to reduce costs and retain revenue and it’s often the marketing and recruitment budgets that get cut first,” says Guy Marson, managing director of Mailtrack, an email marketing company.