ECONOMIC DOWNTURN TO HIT PROFITS UNTIL 2010

UK business leaders expect company performance to suffer for up to three years as a result of the current economic turmoil, according to a new study from global management consultancy Hay Group and the Centre for Economic and Business Research (cebr). The findings suggest that the UK economy will experience another 18 months of slowing growth, which could hit profits to the tune of close to £1 billion, and result in up to 350,000 job cuts.

Russell Hobby, associate director at Hay Group, commented: “Business leaders see tough times ahead – with falling profits eroded further by rising inflation in the short term. Though the economy looks set to avoid recession, UK plc is facing a long, slow climb out of the current dip.”
 
Business leaders forecast that their companies’ profits will fall by 1.3% on average over the current financial year (2008/9) – a drop equivalent to a total of £900 million if extrapolated across the economy – before recovering to grow by 2.7% during 2009/10. Larger companies (those with over 1000 employees) expect to be even harder hit, with profits predicted to slump by 2.2% on average. Financial services bosses see an alarmingly bleak outlook, predicting an 8.4% profit reduction for this year.
 
Hobby continued:  “Aggressive strategies will be required to snatch market share from competitors by offering better value. Business leaders must be ready to divert resources to high performing units, and take advantage of deflated share prices to make strategic acquisitions, if UK firms are to be ready for the next cycle.”
 
The study reveals a worrying outlook for employees: business leaders plan sharp job cuts in 2008/9, expecting their workforces to contract by 1.1% on average – equivalent to around 350,000 job losses across the economy as a whole. The outlook is worse in the financial services sector, where business leaders predict a reduction in the workforce of almost 2%, or some 110,000 jobs – close to a third of all job losses across the UK economy.
 
Workforce numbers are not expected to recover until 2009/10, when they will return to just below current levels. The picture is worse among mid-size companies (500-1000 employees), where two consecutive years of staff reductions are predicted, with workforce numbers falling by 1.4% by 2010.

Senior leaders also predict a slowdown in wage increases – falling to 3.9% in 2008/9 – with no return to last year’s rates predicted during the three years studied. Worryingly in the light of fast falling profits, finance bosses are struggling to keep wages down, with salary growth forecasts outstripping the average: 5.2% in 2009/10 and 5.4% in 2010/11. 

The findings point to at least 18 more months of slowing economic growth – but suggest that the UK will narrowly avoid recession. GDP growth will fall to 1.7% in 2008, and be even lower in 2009 at 1.4%. Growth rates are not expected to return to 2007 levels until as late as 2011.

cebr analysis forecasts a turbulent time for household bills over the next three years, with inflation running well above the Bank of England target of 2%, and expected to remain high in the short term. However, cebr foresees consumer inflation falling to potentially as low as 1.75% over the next two years as the downturn bites. 

John Ward, managing economist, cebr, commented: “UK businesses are facing the most challenging economic environment for more than a decade, as the impact of the credit crunch ripples across the economy and inflation picks up as input prices rocket.”

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