Recession or mild economic downturn?

Gordon Brown’s decision this week to continue with the government’s current spending plans with an extra Poundsd 50bn allocated in the next two years to fund schools, hospitals, policing and transport is encouraging. But there are still doubts over whether this type of spending can be sustained without raising additional taxes.

Unexpected costs from compensating for the foot-and-mouth crisis and the post-Hatfield rail crash repairs coupled with the bursting tech bubble reducing the tax take have hit the economy hard. The cost of military action as well as a possible fall in income tax and national insurance tax from rising unemployment are real threats, so what looked like being a big fiscal surplus for Brown has largely vanished.

Conversely, house prices rose by 2.8% in September – the highest monthly increase since 1993 according to the Nationwide. This suggests the UK may be better placed than Europe, the US and the Far East to weather the recession. A report by the IMF suggested although the UK would not be as hard-hit as other countries, it would be unlikely to grow by more than 2% this year. But Brown’s plans were based on the economy growing by around 2.5% this year and next.

To add to the mixed messages, consumers have been urged by the government to maintain current spending plans, but no one knows how consumer confidence may be affected by events in the US.

So how will this uncertainty affect our profession? Accountancy firms with large IT consultancies were adversely affected by the downturn before 11 September, while M&A and corporate finance departments have reportedly been reduced. Financial advisory and tax work should remain unaffected.

With the corporate sector raising gearing either for acquisitions or share buy-backs, the result has seen a weakening of balance sheets and corporate recovery and turnaround advice should experience a boost in the next 18 months as banks find more customers experiencing difficulty with bank loans.

So it’s not all bad. The well-diversified accountancy practice should find areas of its work will increase, compensating for the decline in others.

  • John Wosner is chairman of PKF.

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