North firms have adapted to the age of recession

Apr 15 2009 by Iain Laing, The Journal

As the recession deepens, we take the temperature of the North East economy with the North Business Barometer. It shows the region is deeply affected by the economic slowdown but by no means moribund. The survey, conducted by Newcastle Business School for nebusiness, is the most detailed analysis of the opinions of the region’s biggest companies. Researchers spoke to a broad cross-section of firms in the Top 250 of the North East’s biggest businesses by turnover in the latest of the six-monthly studies. The results are not as desperate as many feared and as the authors explain here, they also give some signs of recovery in the not too distant future. Analysis by Jackie Harvey, professor of financial management, and Richard Slack, reader in accounting, at Newcastle Business School.

THE analysis of the latest North East Business Barometer is being written against the background of the measures agreed on at the G20 economic summit and their favourable reception by financial markets, evidenced by the FTSE 100 climbing back through the psychological 4,000 benchmark, a level not seen since the middle of February; although it should be noted that this is still a long way from the peak of 6,700 reached in early July 2007.

Despite the desire to grasp any signs of recovery (last month's minor jump in house prices, for example) as indicating that we have reached the nadir of the current crisis, the reality for UK PLC still makes pretty grim reading.

National Statistics data for the last three months of 2008 show that GDP fell by 1.6% (its biggest quarterly fall since 1980) to stand 2% lower than for the same period in 2007. Add to this the dramatic slowdown in manufacturing output (fall in output from production industries of 4.5% during the fourth quarter following on from a fall of 1.8% in the third quarter); the further fall of 0.8% in service industries output over the same period (-0.5% quarter three); the rise in unemployment to 6.5% for the three months to January 2009 (1.3% higher over the year); and finally, the rise in the savings ratio, which having been negative for part of last year rose to 5% during the final quarter of 2008, the highest level since the end of 2005. It is evident that we are not yet out of the woods.

In our last business barometer, published last November, some 42% of respondents expected turnover to fall; 47% expected a reduction in the workforce and the general business climate was perceived as uncertain by 53% and pessimistic by a further 33%.

The fragility of market confidence was perhaps best illustrated by the fact that while only 2% of firms were operating at well below full capacity earlier in 2008, 31% of firms were in this position last November. So how are things today? The latest survey indicates that just over half of all respondents (52.5%) are expecting turnover to fall and just under three-quarters (72.5%) described the general business climate as pessimistic.

On a slightly more positive note, only 17.5% expect any further reductions in the workforce, with half expecting the workforce to remain at its current size and only 12.5% of respondents indicating that they were operating at well below full capacity. This suggests that structural adjustments have already taken place, although it is concerning that for many the expectation is of further contraction in turnover.