A snapshot view of the first quarter 2009

UK in recession

 

In the run up to Christmas 2008, Atradius expressed its grave concerns about the performance and prospects of two hard hit business sectors, construction and retail, as we moved in to the new year and these fears have proven to be disturbingly accurate.

Construction faired badly on a regional basis as contracts dried up, housing failed to re-ignite and the cessation of work on new developments including retail outlets and shopping malls kicked in.  Retail was expected to trade poorly in the lead up to Christmas and then have a reasonable period for two weeks thereafter.  During that time the quarter’s rent became due, which added to the woes of the sector and accelerated the demise of a large number of businesses.  Also, many retailers have paid the rent for quarter 1 2009 in order to gain the boost from the early January sales, but it is now likely that these businesses will limp on until a decision is made about their future operations or the rent becomes due in the final week of March 2009.

Among the high profile retail insolvencies prior to and immediately after the Christmas period, which included Woolworths, MFI, Zavvi, USC, Whittard and The Officers Club, among others, there was a clear trend toward to the use of pre-pack administrations -  a process enabling ailing businesses to absolve themselves of existing debts and commitments to suppliers, landlords, utilities and the Govt without redress.

Many feel that the high number of failures during this period will result in less competition and a greater survival rate of remaining stores that have been under pressure.  Unfortunately, only 1 in 5 pre-packs by the same management go on to survive.  An unsurprising statistic, when the companies end up being run by the same management team that got them in trouble to start with, just under ‘new’ ownership.

The average probability of UK business defaults more than doubled in the last quarter of 2008 and this upward trend has already carried over to 2009 and is expected to continue throughout the first quarter of this year and beyond.

Consumer confidence, the lack of credit and a reluctance to spend has already had a significant impact on the economy and trade. The Bank of England has attempted to stimulate cash flow and consumer spending with unprecedented interest rate cuts, while the government’s VAT reduction and assistance packages for the banking sector have a similar objective.

However, this stimulus fails to take account of the psychology at play.  Typically, homeowners have seen the value of their properties fall every month by an average of 1.35% to the end of 2008 and with concerns about an uncertain future, it’s unsurprising that they’re not keen to spend, irrespective of fiscal stimulus packages. 

In addition, for many, the uncertain future has become a stark reality as the unrelenting rise in unemployment continues unchecked, hitting just under the 2 million mark by mid February. Undoubtedly, the failure of several major retail chains had a significant impact on this figure as they accounted for a significant number of individual stores. The closure of Woolworths alone resulted in the loss of 27000 jobs. 

Our spending patterns and habits will determine how deep and how long this recession is, just as much as the obvious availability of liquidity from the banks. The 1.5% fall in GDP during the fourth quarter of 2008 reflect a significant drop in output during November an December prompting a significant re-calculation of the UK GDP forecasts for 2009 by the IMF indicating a decline of 2.8%, revised from 1.3% only a few months earlier.

The close correlation of this economic performance to insolvency trends, inevitably leads to an escalation of business failures across all sectors, with the latest figures showing an increase of 51% by the last quarter of 2008 compared to the same period a year earlier.  Clearly, further deterioration in the GDP, would have a high impact on insolvencies.

Further difficulties within the automotive sector have materialised during the first quarter as new car registrations for January showed a decline of more than 44.7% compared on a like for like basis.

The knock on of this and the construction industry downturn is now manifesting itself in difficulties with the steel, metals and automotive supply chain manufacturing industries. 

On a regional basis there is likely to be winners and losers and clearly those benefiting from PFI, direct government investment and the preparations for the 2012 Olympics, will fair reasonably well, while the leisure industry, or more specifically the pubs/clubs/restaurant sector, will continue to be adversely hit as discretionary expenditure is held back.

Please check back regularly for further updates, advice and information.