2008 – mid-year report

It's a tough market out there, as our review of the first six months of 2008 confirms.  Just after the mid-year point, we thought it would be worth taking a slightly closer look at what's going on right now and what's likely to happen next (not that anyone can predict it with any level of accuracy).   But whichever way you cut it, the torrent of gloomy economic data seems only to be intensifying at present - and it doesn't make particularly happy reading.  So, in the short term, it's just a case of battening down the hatches and hopefully waiting for the squalls to blow over.

Economy

It's hard to know where to start.  The British Chambers of Commerce have recently warned that the UK is in "serious danger of recession" despite the chancellor's attempts at upbeat noises.  (Curious how it's only our own dear chancellor and the US treasury secretary who seem to have anything positive to say about the economic situation.)  BCC economic adviser David Kern said "The outlook is grim and we believe that the correction period is likely to be longer and nastier than anticipated."  Analyst Christopher Wood - author of the "Greed and Fear' newsletter, and the man who told his clients as long ago as October 2005 that "investors should sell all exposure to the American mortgage securities market" - reckons that, of all the western economies, Britain is most vulnerable to a serious downturn.  Dire mid-year economic data recently sparked a mass sell-off of stocks in London as fears of an impending recession increased, leaving the FTSE 100 in bear market territory for the first time since the dotcom crash.  All the while, the price of oil - which has doubled in the last year alone - is heading inexorably towards $150 a barrel.  And who's to say it won't go even higher?  (Certainly not OPEC.)

Business performance

Growth in Britain's service sector is stuck at 0.3% for the third month running, with the BCC reporting a continuing fall in business confidence among service companies.  Sentiment is now at its most depressed level since 1990.  The service sector - which accounts for 70% of the UK's output - had its worst month since the 9/11 terror attacks, with the CIPS's measure of activity falling from 49.8 in May to 47.1 in June and its business expectations index at a record low.  Paul Smith of Markit Economics said "The issues facing the service sector are rooted in the dual shocks of the financial crisis and surging oil prices."  In manufacturing the picture is similar with the worst manufacturing statistics for seven years, according to the latest Purchasing Managers Index, which fell from May's downwardly-revised 49.5 to 45.8 in June (its worst figure since December 2001).  Output, new orders, exports and employment outlook are all in negative territory.  Credit insurance giant Euler Hermes has just upgraded its forecast of UK corporate insolvencies by a double-digit percentage, anticipating a total of 23,400 across all sectors this year.  (One of the very few growth sectors in the current climate is business fraud - up by 74% in six months, according to BDO Stoy Hayward; it's already cost businesses over £700m this year.)

Interest rates

Faced with all this, the Bank of England has little real room for manoeuvre.  "If the Bank of England reduces interest rates, it risks losing control of inflation," says Institute of Directors' chief economist Graeme Leach.  "Conversely, if it increases interest rates it risks losing control of growth and could trigger a recession."  (Because of this, it's unlikely that interests rates will move significantly in either direction over the next few months.)

Consumer confidence

It's hardly surprising that consumer confidence is at its lowest level for eighteen years.  The squeeze on household incomes - with pay settlements sticking around the 3.2% level, but ‘real' disposable incomes falling by 1% quarter on quarter and fuel, utility and food bills continuing to soar - means people are now saving less money than at any time since 1959.  (This decline in savings has been accelerating sharply - down from around 10% of income a decade ago to 6.3% at the end of 2006, 3% in the final quarter of last year and just 1.1% now.)  Global Insight chief economist Howard Archer says "This reinforces the belief that consumer spending is set to be reined in for an extended period."  Meanwhile house prices have been in decline for the last nine months, recording their worst annual fall for sixteen years, with the industry's more pessimistic observers forecasting a drop of as much as 30% by the end of next year.  The number of mortgage approvals has fallen to its lowest level for fifteen years, and mortgage lending is now running at about half what it was at during the last housing recession of the early 1990s.  (Merrill Lynch analyst Mark Hake thinks the downturn in the property market already looks "considerably worse" than the last crash.)

Employment prospects

A new consumer survey from Lloyds TSB reveals that job security and employment confidence levels have fallen to their lowest since the survey began in November 2004.  Meanwhile the CIPD's mid-year update on the state of the jobs market warned that any rise in interest rates would put a brake on recruitment and risk "an avalanche of redundancies."  Last December, the institute had predicted that 2008 would be the UK's worst year for jobs in a decade.  CIPD chief economist John Philpott says "We predicted some growth in employment - though only a third of that enjoyed in 2006 and 2007, and not enough to prevent a rise in unemployment - resulting from a squeeze on recruitment and a limited increase in redundancies confined to certain sectors.  Although this forecast was initially considered pessimistic it is line with labour market forecasts, and if anything now looks relatively optimistic in comparison with the prevailing mood of economic doom and gloom, widespread reports of a significant slowdown in recruitment and a growing number of large-scale redundancies.

Worse than expected?

"However, our initial forecast was based on the assumption that UK interest rates would fall in the second half of 2008," he continues.  "This now seems unlikely, increasing the risk that the outlook for employment and unemployment will be worse than originally expected.  Moreover, the CIPD now also expects limited if any growth in employment in 2009, with the number of people unemployed and in receipt of Jobseekers' Allowance rising back above 1m.  This more subdued forecast assumes that Bank interest rate remains unchanged throughout the remainder of 2008.  A rate cut or cuts would increase optimism, but a rate hike would be a cause of major concern.  Many employers have their finger on the redundancy trigger.  They are not yet ready to start firing, but a rise in interest rates would probably be enough to cause a substantial jobs cull come the autumn.  And once this starts, the economy could witness a sudden ‘avalanche' of redundancies."

Two tough years to come?

The axe has already started swinging in some sectors, of course.  In the City, the hard-hit financial services sector is expected to lose a further 10,000 jobs before the summer is out, according to a report from the CBI and PwC.  CBI chief economic adviser Ian McCafferty said "The impact of the credit crunch on financial services has deepened over the last three months and conditions look set to remain difficult for some time yet."  Recruitment firm Hays reported that City recruitment had "collapsed" by up to 20% over the past three months, with growth in temp jobs outstripping permanent posts for the first time in five years.  On the broader front, the OECD has predicted that the UK faces a 100,000 rise in unemployment over the next two years, with finance, property and construction among the worst-hit sectors.  (If accurate, this would see the jobless rate rise from 5.4% to 5.8%.)

The impact on advertising

According to Trinity Mirror chief executive Sly Bailey, the present state of the advertising market is "inextricably linked" with the health of the economy.  (Indeed, some would describe advertising as the canary in the economic coal-mine.)  The company's regional division has recently seen an 8.4% fall in recruitment ad revenues - and if you thought that was bad, the falls in motors and property were more than twice as big.  Other regional press groups have also reported double-digit declines in classified revenues - and when the market does finally turn back up again, it remains to be seen how much of it will return to the print medium.  (That said, even online hiring activity is slightly down, as reported by the latest Monster Employment Index.)  Citigroup is forecasting a 20% drop in regional classified recruitment by the end of the year - and also predicts that, by 2012, the sector will have declined by £650m from its 2004 high water-mark of £1.8bn.  On the agency side there's anecdotal evidence that plenty of organisations are still quite busy, and long may this continue.  But survival looks to be the name of the game over the next eighteen months or so - and a pricing model that gets a fair return for the expertise provided, of course.

Weathering the storm

If there's one thing to be set against all this doom and gloom that's mildly encouraging, it's the fact that - unlike in previous recessions - jobs haven't been the first thing to go.  There are some signs that, given today's skills shortages and the continuing war for talent, organisations are doing what they can to defend their human capital resources for as long as they can (new graduate hires being a case in point).  But everything depends on how much more poison still remains to be discovered in the global financial system, of course.  So let's hope that the ‘secret' hedge fund report quoted in a Swiss newspaper recently - that the banks stand to lose some $1,600bn from the current credit crunch, rather than the conventional best guess of $400bn - is wide of the mark.  And if you happen to know the precise date that market sentiment is destined to turn, do let us know (in advance).  Best of luck!