Business must brace itself for bumpy road

FIRST THE GOOD NEWS: the insolvency rate is beginning to stabilise, and not as many businesses are failing as might have been expected. But the road to recovery will be a long and rocky one. We won’t see a significant reduction in business failures before 2015 as businesses contend with painfully slow growth and continuing global uncertainty.

That’s the mixed picture that emerges from BDO’s latest Industry Watch report, which draws on recent data from the Department for Business, Enterprise and Regulatory Reform and detailed economic forecasts by the Centre for Economics and Business Research (CEBR).

Business failures are expected to fall by a fifth (21.6%) from a peak of 26,196 in 2009 to a predicted 20,536 in 2015 – still well above pre-recession levels of 16,431 in 2007. We expect failure rates this year and next year to be marginally higher than in 2010, though still lower than most predictions.

In Q2 of this year, the UK economy expanded by just 0.1%, down from 0.4% in Q1. The Office for Budget Responsibility (OBR) is almost certain to reduce its GDP growth forecast of 1.7% for 2011 – 1% looks more realistic. At the same time, the unemployment rate – remarkably resilient so far – jumped to 7.9%, the sharpest increase since May 2009.

Households to struggle

The poor outlook for UK households is the biggest challenge right now. With inflation rising twice as fast as earnings, consumers are being squeezed hard. We expect consumer spending to fall by 0.8% in 2011; the value of household goods sold in June this year was 3.3% lower than in June 2010, according to the latest estimates from the Office for National Statistics.

Government spending cuts and increasing energy prices will put further pressure on household budgets. As a result, we expect to see a rise in failures in the retail and wholesale and personal services sectors, while leisure and hospitality will also suffer.

With domestic demand stalling, the UK must look to international trade as the route to growth. We expect net trade to make the biggest single contribution to UK economic growth, and predict a 5.3% growth in exports in 2012.

Export-led sectors feel the heat

However, export-led sectors such as manufacturing and business services, which have enjoyed a less troubled ride thanks to their international customer base, are now feeling the effects of global economic volatility. To make matters worse, the UK is heavily exposed to the most troubled markets: the European Union accounts for 55% of UK goods exports, and we export more to Ireland than to Brazil, Russia, India and China combined. The Euro crisis and US deficit underline the UK’s urgent need to rebalance its export economy.

There are some reasons for optimism. Cebr expects inflation to fall sharply next year, giving households more real spending power. For exporters, although the pound may strengthen against the Euro, there is little chance of a return to much higher pre-recession exchange rates. Despite the increased uncertainty, our total business failures forecast is only marginally higher than last quarter.

What is certain is that the UK business environment will remain tough for some time. The question is how tough.

Shay Bannon is a partner and head of business restructuring at BDO LLP

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