Recession Looms as Optimism Falls Among South West Businesses

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Most business leaders in the South West now believe the region is entering a full-blown recession – with no improvement in general economic conditions expected for at least 18 months.

There is an almost unanimous fall in the level of optimism about the state of the UK economy, although more than a fifth of businesses believe our region continues to outperform the country as a whole.

The latest monthly survey from leading business advisory firm Deloitte, paints a gloomy picture for the next six months with employment, order books, output and stock levels and capital investment all forecast to be hit.

“Our latest results show a marked deterioration in comparison with the comparable survey we carried out earlier this year,” said Denis Woulfe, Senior Practice Partner at Deloitte in Bristol.

“Since then of course, the credit crunch has turned into global financial crisis, with Government intervention in the banking system, continuing falls in house prices and rising unemployment. While our region is better-placed than most to withstand the downturn, clearly no-one is immune.”

RECESSION AND RECOVERY

More than half – 53 per cent – of survey respondents now believe the South West is entering recession, with a further 38 per currently undecided. Only 9 per cent maintain that a recession is not imminent, citing strong order books and no noticeable increase in late payment among their customers.

Exactly half of those surveyed believe an economic recovery is between 18 months and two years away, with another fifth believing that improvement will take even longer. A quarter of companies see a 12-18 month time frame as being more likely.

In terms of confidence levels, the findings of the latest survey are even starker. An overwhelming 97 per cent of respondents say they are less optimistic about the state of the economy than they were six months ago, with 78 per cent ranking our region’s prospects as being either the same or worse than those of the UK as a whole.

Denis Woulfe commented: “The members of our panel are `at the coalface’ of the economy and most of what they are reporting does not make easy reading. However, the fact that 22 per cent see the regional picture as being more encouraging than the national one, gives cause for hope.

“Most commentators see the downturn as lasting up to two years and our findings merely reflect this view, although it is interesting to note that almost a third believe the worst will be over within 18 months.”

KEY INDICATORS AND VULNERABLE SECTORS

Exactly half of those who took part in the latest Deloitte survey expect to cut jobs in the next six months, although 47 per cent expect no change. The same number is forecasting shrinking order books, although 9 per cent say these will actually increase.

When it comes to output and stock levels, a clear majority – 58 per cent – expect a fall, with 47 per cent predicting cuts in capital investment levels. The only areas where businesses do not forecast major cuts are investment in training and mergers and acquisitions, where in both cases, 13 per cent of respondents predict an increase.

And there is increasing evidence in the latest survey that the turmoil in the banking sector is affecting businesses in the South West.

Fewer than 10 per cent of respondents said they had seen a reduction in the availability of capital to their business in our survey earlier this year – a figure which has now risen to 32 per cent. Likewise 53 per cent expect existing finance to become more expensive, while 44 per cent predict that new or renewed credit will cost more in the coming months. Some 37 per cent expect lending conditions to tighten in both categories of finance.

When it comes to sectors, property and construction companies are seen as being most at risk from the credit crunch and a potential recession, being cited by 33 per cent in our survey. Retail (23 per cent) and financial services (22 per cent) were also seen as being vulnerable by respondents, who were asked to identify the three most exposed sectors.

Meanwhile agriculture, food and drink, technology, media and telecommunications, transport and distribution, and the professions, are all seen as being the least exposed to the downturn.

Denis Woulfe said: “There has also been a noticeable decline in these key areas compared with our previous survey on the state of the economy, whereby the numbers forecasting no change in employment, output and stock levels have all begun turning into projected decreases.

“The sectors which have been identified as being most vulnerable are those which have dominated the headlines in recent months, but there can be no room for complacency amid mounting evidence that the financial and property crisis is spreading to other areas of the economy.

”As all businesses know, increasing bad debt is one of the key signs of a downturn and can threaten the stability of the most healthy organisation, so it is particularly worrying to see that 28 per cent of our panel report that late payment has become more of a problem.

“As always, management teams will need to stay alert to the wider economic factors affecting their businesses and markets, as conditions continue to become more challenging. That said, our region is home to a large number of solid and proven businesses, and most remain well-placed to withstand the current difficulties, however long they last.”