The year ahead: how low can it go?

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.’

How should business respond?

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

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.’

Vernon Dennis, head of corporate recovery and reconstruction at law firm
Howard Kennedy, says: ‘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.

What about that pension fund?

‘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
five years.’ 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 than more.’

This is an abridged version of an article that originally appeared in
Financial Director

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