Is the coming year going to be as bad as the pundits are telling
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
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
“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,
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,
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
an email marketing company.
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“This is a very short-sighted approach. If you look back to past recessions,
those who continue to market and expose themselves to prospective consumers tend
to fare best when the good times return and may even win business during the
lean times. This is where we are in a different position to previous recessions,
because we have a vast and mature digital marketing channel that is very
cost-effective and measurable in its results.
“Companies that spend intelligently in the digital space will be in a good
position to expose themselves to the market, while keeping a tight rein on
costs. If it works, spend more, if it doesn’t, try another digital route to
market and you should be rewarded,” he advises.
What about the prospects for an Obama-led US economy?
Luckily for the president-elect, the markets have already discounted most of the
bad news. Trouble is, there might be more bad news to come for the US economy.
“The main story for the start of 2009 in the US will be the inauguration of
Obama as president and how his ‘cabinet of stars’ will handle the economic
crisis and the ‘war on terror’, while fulfilling the campaign promises that his
‘Yes We Can’ run for the highest office in the land made,” says Jeremy Cook,
chief economist at
First, a foreign exchange broker.
“We believe that the US housing market has not yet reached the bottom as
unemployment has not rocketed as it can. With unemployment rising, foreclosures
will keep on rising and further dampen property prices.
Whether the Fed will dip its toe into interventionist waters remains to be
seen. In the short term, while we believe the US economy will be in a recession
for the whole year, the Obama presidency will be good for the greenback and he
will be helped by a strongly Democratic House and left-leaning Senate,” he
We should, therefore, expect a strong dollar, weak pound and a
strongish euro in 2009?
Predictions vary widely with analysts expecting the pound to be trading between
$1.45 and $1.79. “We believe we’ll see a dip into the $1.40s before a recovery
to the high $1.60s or $1.70s in the second quarter of 2009,” says World First’s
Cook. “Sterling can no longer be labelled a ‘high-yielding’ currency after the
shock 1.5% interest rate cut in November. With growth returning to the economy,
we would expect sterling to perform better against most currencies over the
course of 2009, although a poor start is entirely possible,” he says.
Marc Cogliatti, a currency strategist at HiFX, another UK-based foreign
exchange broker, says, “We expect the pound to remain under pressure against all
its major counterparts throughout the majority of 2009, as the Bank of England
continues to cut interest rates in an attempt to stabilise and promote growth in
the fragile UK economy.”
Cogliatti believes the US dollar is likely to continue to be a dominant force
despite the Fed’s “ultra-loose stance on monetary policy and the crumbling US
economy”. He explains: “The main reason for the recent surge in the dollar has
been a flight to cash, with funds being forced to sell out of investments and
repay their debt. With the global economy likely to remain under pressure
throughout 2009 and also tighter controls on lending and borrowing, it seems
unlikely we will see the sort of investment needed to reverse this trend.”
Cogliatti believes the euro will be the under-performer in 2009 as cracks
continue to open up in the eurozone economy and the European Central Bank
abandons its “hawkish” stance on interest rates.
So will emerging economies be powering global GDP in 2009?
Some predictions suggest all of the modest 2% or 3% growth in the world’s
economy next year will come from developing economies such as Brazil, Russia,
India and China (BRICs). Fitch Ratings says world GDP will grow at 0.9% in 2009,
while BRIC GDP will grow at 5.7%. “Cheap labour, raw materials and other exp
orts will continue to be central to BRICs’ export competitiveness and overall
economic performance,” says City University’s Nesvetailova.
But even among the BRICs there are problems. Growth is slowing in China and
there are also problems in Russia, which has seen the value of its financial
market wiped out by 70%, says Nesvetailova.
“Without capital inflows into its financial market, with many banks exposed
to securitisation losses and with oil prices below their peak levels in late
2007 and early 2008, Russia has lost a key source of its economic ‘strength’ and
it is likely that it will be the most poorly performing BRIC in 2009,” she adds.
The failure of the banking system is at the root of many of the
problems. Are we now over the worst?
The measures various governments have put in place should mitigate further
crises, argues economist Geraint Johnes of Lancaster University Management
School. But he warns, “These policies come at a real cost, in that they involve
commitments by the taxpayer that will make consumers more cautious about
spending. That will make it harder to pull out of recession. There is likely to
be a lot more regulation imposed on the banking sector, and this will have an
impact in three areas.
“First, it will force the banks to become more cautious about their
investments, especially in derivatives where the precise nature of the risks
have, until now, not always been well enough understood by investors. Second,
there will need to be a realignment of incentives paid to workers in the banking
sector, to ensure individuals are not rewarded for taking excessive risks.
Third, the increased concentration in the banking sector that has come about as
a result of the recent merger activity will have to be monitored in order to e
nsure that banks’ customers are not exploited.
“If this regulation is properly implemented, then businesses and consumers
should benefit from a safer banking system, though banks themselves will
probably not welcome the constraints on their flexibility.”
Roy Leighton, chairman of the Financial Services Sector Advisory Board at UK
Trade & Investment, points out that the British banking sector’s diversity
could prove a saving grace in 2009. “We are the world centre for project finance
and there is no doubt that mines will be dug, water will be desalinated and oil
wells will be sunk in the future. Trade finance, in which we excel, will still
The banks would argue it’s the fall in house prices in the US and
elsewhere that’s caused a lot of difficulties. Will estate agents be smiling in
Probably not. Predictions are that house prices could bottom out at anything
between 20% and 40% below their peak towards the end of the year. But this could
hide some more subtle underlying trends, argues Nesvetailova.
“House prices will follow a sectoral pattern. In some places, like the
southeast, average price levels will remain relatively resilient, though the
downward pressure will be tangible. In other places, however, house prices will
continue their decline.
“Generally, it seems rather unlikely that prices will start rising in 2009,
though investor interest from overseas and falling rent revenues will direct
capital into the housing market, thus prompting prices to stabilise at a level
30% to 40% lower than the peak level in 2007. Having said that, these
projections are based on current trends and in today’s economic climate, it is
hard to predict the behaviour of sensitive indicators,” she says.
But what about the real economy? Will manufacturing be taking it on
the chin again in 2009?
One-fifth of the British economy relies on manufacturing and it directly
supports four million jobs, one-seventh of the nation’s workforce. There are
still manufacturers that are doing well air generator and compressor business
Aggreko and engineering support services company Wood Group are two that
announced significant revenue and profit growth towards the end of 2008. And
firms that rely on exports should benefit from a weaker sterling. All
manufacturers should benefit if oil and commodity prices continue to ease during
But Stephen Graham, director of the Scottish Manufacturing Advisory Service,
notes that the general picture is not encouraging, particularly for SMEs. “The
level of optimism is falling and there is growing uncertainty on business’s
forward order books as consumer confidence continues to fall,” he says.
“As you would expect, businesses are looking at their cost base and staffing
levels and are looking to postpone or delay investment decisions in training,
new hires and capital expenditure.
“Cash flow and liquidity are key challenges and we are hearing that bank
funding is proving to be extremely difficult new credit facilities are very
hard to find and existing facilities are being priced more aggressively and
costly. The net effect is a further dent in manufacturing confidence.”
And retailers will suffer, too; they are about to post their worst Christmas
since Santa was a lad. Shoppers will be cutting back further in 2009. But HiFX’s
Cogliatti points out that interest rate cuts could encourage people to keep
How will the private equity sector fare in 2009?
Well, it fell to earth like most other sectors in 2008 as deal flow dried up in
the face of the freezing of debt markets. “Currently, fund managers are finding
it difficult to raise capital as investors are reluctant to make long-term
commitments in the face of financial uncertainty,” says Timo Tschammler,
managing director of international investment at DTZ, the real estate adviser.
“The composition of the fund market has changed a great deal. Between 2007
and 2008 there was a shift towards raising debt, as debt funds raised more than
twice as much so far in 2008 as in the same period of 2007. However, the credit
crisis has reversed this trend.”
Andrew Hawkins, managing partner at Vision Capital, which buys portfolios of
companies, says, “We’ve taken a deliberately cautious investment posture,
assessing the potential value of deals on a case-by-case basis. While there’s a
huge deal pipeline, we have seen surprisingly high-value expectations. Vendors
need to become more realistic for us to see any attractive opportunities.
A fall in valuations combined with a slight thaw in the debt markets could
create some interesting opportunities during the course of 2009. Furthermore,
our conserved cash will go twice as far as it did a year ago.”
And what about that perennially thorny problem the pension fund.
More trouble this year, presumably?
“The triple whammy of a falling global equity market, the worsening economic
outlook and reduced free cash means that companies are facing the toughest
environment ever for final salary pensions,” says Marcus Hurd, head of corporate
solutions at Aon Consulting. “Just as employers thought the economic news
couldn’t get any worse, however, trustees could hit them with more big bills to
pay for their pension schemes when they can least afford it. If all final salary
pension schemes were assessed for financial adequacy right now, then it is
likely that contributions would soar by an additional £45bn a year for the next
But he advises, “Rather than an increase in pension scheme contributions,
however, companies really need support from their pension schemes. Sensible
financial plans, which ease pressures in the short-term, are required to ensure
companies can meet their pension obligations in the long term. The sensible
outcome may be that companies should, in fact, be paying less in 2009 rather
Clive Fortes, a partner at pension advisers Hyman Robertson, argues, “My
advice for FDs in 2009 is simple. Your defined benefits pension scheme is just
like any other business and not a particularly complex one at that. Spend t
ime understanding the dynamics of the scheme, develop a robust strategy for its
long-term management and then implement that strategy.”
And Fraser Smith, director for the northern region at global HR consulting
firm Buck Consultants, warns: “A significant issue that will be concerning FDs
as we move into 2009 is that the disclosure of the pension deficit in company
accounts which is linked to corporate bond yields will strike with a
vengeance as confidence returns to debt markets.”
Best to stay in bed this year, then?
Only if your business is already heading for the buffers. “I would think there
will be casualties across various sectors in 2009 as the banking crisis
continues to make its effects known,” says Selftrade’s Barber.
“But with a shakeout over, the effects of government policy known, stability
in equity markets, inflation under control and interest rates low, looking ahead
to 2010 business should be more confident than it is today. By the end of 2009,
business will be feeling optimistic about the future once again.”
And there’s good reason why businesses should be more optimistic, adds Roger
Bates, a director at ea Consulting Group. “It would be difficult to be more
pessimistic than they are at present.”