2009: Year of False Dawn?

Date 03 December 2009 For immediate release 2009 might well be remembered as the year of the false dawn according to Andy Beckingham, Chairman of the R3 Southern Region and Business Recovery Partner at BDO LLP as the leisure industry in the South continues to battle against the recession. This year has seen the economy almost grind to a halt after years of boom and many business leaders have had to make tough decisions just to survive. The South has been traditionally strong in leisure and tourism as well as technology and manufacturing, but all of these sectors have been hit hard by a sharp decline in consumer spending, the difficulty in securing finance and the general uncertainty in the market. Of course, particularly on the South Coast, our football clubs play a significant role in the leisure industry and so peoples’ perceptions of how well the region is performing could well be very closely linked to the health and wealth of their favourite club. With AFC Bournemouth going in and out of administration and Southampton FC doing likewise and currently sitting at the bottom of League One (at the time of writing), the message to the public is only too clear. Even Premiership outfit Portsmouth, currently languishing at the bottom of the division, has been struggling to fund its wage bill, let alone the new players it will need to prosper come the January transfer window. In line with the rest of the country, the South entered the downturn with a cyclically weaker balance sheet than might have been expected 15 years after the last recession. We have seen significant over-gearing within both companies and individuals and this has been compounded by unprecedented levels of government borrowing and a banking sector facing its own challenges. Businesses and politicians alike have been unable to call the “shape” of the recession with any confidence. Are we headed for a double-dip or will it be conveniently v-shaped as some would have us believe? Hindered by a lack of clarity about the longer term outlook, many businesses appear to have resorted to short-term decision-making and planning and, in some cases, simply to fire fighting as funding sources have dried up. This combination of factors has further reduced business optimism. For the moment, however, government-generated stimuli have proved a strong anaesthetic against the pain of a deep recession; we continue to enjoy low base rates and quantitative easing has injected liquidity into the economy. It might well be that these measures will generate something like a record growth rate later in the year, but we should not be lulled into a false sense of security – when the stimuli wear off, a more reliable picture of whether the recovery is robust and sustainable will emerge. Previous recessions have come to an end at some pace through a consumer-driven recovery. With household consumption effectively making up the largest part of GDP, the government will hope that, in the right environment, individuals will spend their way out of trouble. However, the last quarter of this year could well demonstrate just how damaged the consumer wallet is. This year has seen a decline in consumer credit , credit card limits stripped back and the unavailability of equity release, all of which will potentially strip the economy of £50bn of consumer spending. For the time being, economic recovery seems to have stalled. What’s more, after a poor 2008 and a rather wet summer this year, large parts of the leisure and tourism sectors in the South have already been faced with a particularly unwelcome squeeze. Statistically, visitor numbers are up (coinciding with the word “staycation” entering our lexicon), but late bookings at reduced margins have caused uncertainty and domestic tourists have spent less cash on food, drink and ancillary leisure activities than industry bosses had hoped. The burden will be increased further on employers in the South and elsewhere by the recent increase in the minimum wage and the ruling that tips can no longer be used to top-up wages to minimum-wage level. This will inevitably drive up business costs and will particularly impact on hotels, guest houses, restaurants and bars across the region. For most, the summer months business ‘boom’ just hasn't happened. On top of these recessionary pressures there is a much bigger ticking time bomb waiting to explode. Many businesses unable to manage their working capital through conventional means have turned to the Crown for support in the deferral of (often huge) PAYE and VAT liabilities. These "Time to Pay" liabilities will need, at some point, to be unwound and the way in which this is managed, and over what time period, will impact hugely upon business failure rates. Whether as a means of emergency cost-cutting, or in response to insolvency, jobs will be lost. If businesses fail, then the opportunists will, understandably, swoop to pick up their turnover. However, with surplus capacity across all sectors, 15 years since the last recession, it will be order books in demand rather than the people and capacity to service them. Although the “green shoots of recovery” have been widely reported, 2009 could yet be remembered as the year of the false dawn. - Ends - Andy Beckingham is Business Recovery Partner at BDO LLP, andy.beckingham@bdo.co.uk.