We may not be heading for another Great Depression, but for many it may feel uncomfortably close to it. Nick Britton speaks to business leaders and analysts about the effects of the downturn and their outlook for the coming months

We may not be heading for another Great Depression, but for many it may feel uncomfortably close to it. Nick Britton speaks to business leaders and analysts about the effects of the downturn and their outlook for the coming months

John Hawksworth
Head of macroeconomics
PricewaterhouseCoopers

Not as bad as past recessions

Until a few weeks ago, many people thought the recession would be mild or relatively short-lived. Now, there are clearly risks that something nastier is happening. We are probably going to see a prolonged period, maybe two years, where the banking system attempts to retrench. Growing businesses will find it tougher to get credit, and when they roll over their banking arrangements, they may find terms have got tighter. We’re expecting a slowdown in consumer spending growth, which has been a major factor driving the economy, to near zero next year in real terms. However, we’re hoping that interest rate cuts will help the economy to start growing again by 2010, and we don’t expect to see as many insolvencies as in the early 1990s.

Alwyn Welch
CEO
Parity (IT services company)

A mixed picture

We started to see things get tighter around Easter, but in the past three or four months they’ve got a lot tighter. Our [IT] recruitment business, which serves the public sector, is doing very well. But we’re seeing a very volatile market in our training business. People aren’t making dramatic cost cuts, but they’re delaying spending, then rushing to catch up. Our overall turnover is forecast to be slightly lower this year at £150 million. In response to the downturn we’ve made tough decisions on people, and shut two offices where we’ve been able to consolidate. We’ve also engaged a PR firm and invested in a stronger sales team because surviving a recession is about addressing the top line as well as cutting costs.

Jamie Constable
CEO
RCapital (turnaround investor)

A glut of opportunities

We’ve seen a massive increase in companies seeking turnaround investment lately. The construction industry was hit early; now retail is suffering, and companies that supply retailers will follow. One of the main reasons companies are in trouble is that they have a lot of debt in them, so if turnover falls ten to 15 per cent, they can’t cut costs quickly enough to cope. For a while, banks have been comfortable lending at six, seven or eight times a company’s earnings before interest, taxes, depreciation and amortisation (EBITDA); now, it’ll be two times the EBITDA. Any cash-negative business has a serious concern, but if it’s receiving payment for goods before having to pay its suppliers, it should be in good shape.

Chris Warren-Smith
Partner
Fulbright & Jaworski International (law firm)

Tougher regulation AHEAd

For financial markets, the one near-certainty is tighter regulation.
The FSA promises to apply “stress tests” to institutions in order to ascertain their ability to survive severe economic conditions. Interestingly, the CEO of the Japanese Financial Supervisory Agency recently reported that this testing had reduced the country’s exposure to the credit crunch. In the US, the regulators may go as far as establishing mechanisms to remove bad assets (such as collateralised debt obligations) from the market, but it’s unclear as to whether exposures in the UK merit that kind of measure. Greater transparency and a more solid capital base are also likely to be high on regulators’ wish lists.

Martin Warner
Founder
TalkBizNow.com

Scary time to start a business

We launched our professional networking website on 18 August in San Francisco and London. I’d be really worried if we hadn’t already raised enough money to get through two years. We’ve been through three funding rounds, the second and third of which brought in venture money. I saw a huge difference between rounds: there was a much greater degree of caution on the third round, with investors taking longer to make decisions. Some told us: ‘We don’t know how we’re likely to position the company in the future because we’re still funding our existing investments.’ A lot of VCs have enormous wealth and impressive connections but even they’re finding it hard to use their relationships to leverage themselves.