Analysis: The brink of recession?

The UK’s gloomy economic outlook received a slight reprieve last week when the Bank of England agreed a further quarter point cut in interest rates, a cut intended to stimulate economic growth, amid growing concern that the slowdown hitting the United States will turn into a global recession.

But has it come too late to save UK plc from the jaws of recession? Or are the current trends simply part of a natural, partly psychological, reaction to a slowdown?

A look at the bustling activity in corporate recovery sectors of the Big Five accountancy firms gives a good indication of where the economy is heading. And the word is that despite the doom and gloom in the pressÿ? and a marked upturn in restructuring and insolvency workÿ- the outlook is far from all bad.

The increased work is timely for the Big Five, which has suffered from a large drop in business across most service lines.

Deloitte & Touche is busy bolstering its corporate recovery department in light of the increased workload and recently poached four corporate recovery partners from rival PricewaterhouseCoopers.

And despite intentions to continue recruiting for the corporate recovery practice, Aiden Birkett, who will head the firm’s reorganisation and transaction services practice, is upbeat about the UK’s future. ‘I doubt the UK will go into recession. There are a lot of mixed signals. Nobody can predict with certainty what will happen. This isn’t the early 90s.

‘We have low interest rates, the banking sector is in good shape and there is lots of money around. A fall in confidence doesn?t bring about a recession,’ he argues.But, he expects business in the recovery sector to grow before ‘we get slacker’.

Cyclical process
Some experts say the increase in insolvency work is all part of the cyclical process following a prolonged period of a benign economy and those businesses suffering now are almost natural wastage. Indeed it is a time when entrepreneurs prove their metal.

One corporate recovery expert pulls out a quote from Shakespeare to highlight the trend. Something akin to ‘all men proving to be good sailors in calm seas’.KPMG’s corporate recovery national practice, which includes the restructuring practice, has been continuously growing since the end of 1999. In the last eighteen months, the practice has grown by 11%.

Mike McLoughlin, head of Lender Services of KPMG UK, says: ‘We’ve been busy since the third quarter of 1999. There’s been a gradual increase over the last five years. Those people who were hanging on during the benign economy are falling off the edges now. More downturn causes a lack of confidence so people spend less money. The current climate is almost a self-fulfilling prophecy.’

Some of the statistics emerging from various source, including the Big Five, have been, if not thought-provoking, downright alarming. First-quarter figures from KPMG comparing 2000 to 2001 reveal receivership figures rose 12% from 254 to 285.

Results from Mandis Information Services, which tracks corporate UK, confirms a slowdown is already affecting certain sectors in Britain. Each of the 22 sectors Mandis monitors show a sharp drop in activity.

Profit warnings
The number of profit warnings for the first quarter of this year also contradicts the diagnosis that things are not as bad as they seem.

News that UK profit warnings soared by 77% to 136 in the first quarter of 2001 offers a glimpse of the economic depression that could be slowly permeating the UK from across the Atlantic.

Ernst & Young’s quarterly survey, which measured a record increase in the number of warnings – appears to give a stark indication of worse things to come for UK plc.

Poor trading conditions were made worse by a harsh winter, the foot-and-mouth epidemic and continuous problems with transport systems.

Alan Bloom, head of corporate restructuring at E&Y, says medium-sized companies have borne the brunt of the slowdown, with warnings rising to 31% from 21% a year ago. And the firm has found the stock market to be particularly unforgiving, with companies losing an average of 22% of their value after issuing warnings.

IT hardest hit
As expected, it is the IT sector that is bearing the brunt of the slowdown with the highest quarter-on-quarter increase in profit warnings climbing by 14% to 19%, followed by the hospitality and entertainment sector and the support services industry.

But many consider what is happening in the IT sector as a market correction more than an effect of the global slowdown.

‘Some companies may not survive to make further warnings. The survivors will be those who can demonstrate productivity in areas that will save their customers money – like e-enablement and outsourcing,’ says Bloom.

Mounting activity in the accountancy firms’ corporate recovery services and end of first-quarter results appear not to leave much hope that we are seeing just a short economic downturn.

This is despite the fact many insolvency experts say even if the US has caught a cold the rest of the world won’t sneeze. However, for some the handkerchiefs are already out over here.

Links

Auditors to be get recession advice

E&Y: UK can weather economic storm