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Europe | Great Britain | 2010-07-04 UK Recovery still an Uncertain Thing Tight lending conditions continue to threaten UK recovery  Bildquelle: sxc.hu A newly published research survey from Roland Berger Strategy Consultants shows that the economic crisis is far from over. The critical liquidity issues in UK business, which have characterised the downturn, have not eased and combined with the lack of restructuring in 2009 will threaten the UK’s return to economic growth in 2010. This survey was conducted with UK board members to gauge the continuing impact of the economic crisis on major UK companies and to gain an understanding of the opportunities arising from potential recovery.
Klaus Kremers added that with uncertainty over the bottoming out of the crisis and timing of recovery, the imminent UK Budget had the potential to greatly impact the fragile state of most UK companies. If the Budget delivered higher tax and VAT rates, which most of the surveyed companies were expecting, then the level of consumer spending would be reduced further, greatly impacting the speed of recovery. Companies could need to further address their cost base and ensure it was as flexible as possible. Ongoing crisis measures UK companies have been forced to actively manage the crisis through liquidity controls, rigorous cost cutting and business plan adjustments. Despite being eighteen months into the crisis this trend is set to continue, with most companies surveyed continuing to restructure over the next 12 months. Although the level of compulsory redundancies across UK companies is declining, pay and recruitment freezes will remain the most important measures in 2010. Companies have been compelled to cut personnel costs by approximately a tenth in 2009 and most are looking for further savings of 8% for 2010. Most companies did not sufficiently prioritise cost cutting in 2009 and were too slow to implement restructuring measures, resulting in prolonging the necessary restructuring into 2011. A third of companies faced a liquidity crisis in the downturn and the outlook remains uncertain. Companies continue to focus on operational measures to ensure liquidity but half of those surveyed are still experiencing deteriorating credit terms. The liquidity situation had the potential to significantly impact companies during both a prolonged downturn and a recovery phase, said Klaus Kremers. Companies looking to take advantage of a recovery would need to fund working capital as sales improved, while a prolonged downturn could require a second wave of restructuring to ensure sufficient cash flow. Limited recovery expectations Only half of those surveyed (49%) believe the worst of the economic crisis is over. However, most companies expect some economic growth in 2010 (between 0.5-1.5%) with stronger growth of 1-2% anticipated for 2011. Whilst 86% of the companies expect to reach pre-crisis sales levels by 2012, a heavier tax burden and restrictive lending will worsen conditions in the short term. Investment levels frozen in 2009 are not expected to increase in 2010 as most companies are expecting 2010 investment to continue to be impacted to a similar extent. This could further delay recovery expectations and limit potential growth opportunities. Potential Growth Asia has been identified as a clear opportunity for growth by three quarters of the respondents, but significantly less optimism was expressed for European growth opportunities. Over half expect to finance future growth using their own resources – evidence that companies are unwilling or unable to secure further debt. Management and shareholder risk aversion is expected to be the main hurdle impeding companies from capturing future growth opportunities, as well as the sharp reduction of current working capital levels. International comparison When comparing to a survey conducted internationally, most companies in Western Europe believe the economic crisis will level out at the same time across Europe. Significantly though, the majority of Western European companies are focusing on growth and sales initiatives for 2010 whilst the UK is still focusing on cost cutting and adjusting business plans. Commenting on the international findings Klaus Kremers said, While most other European countries had been impacted in a similar way to the UK, they took faster action to implement cost saving measures in 2009. The difference in focus for 2010 indicated that UK companies were still behind in adjusting their cost base and remained slightly more uncertain or cautious over the recovery. Liquidity expectations in Western Europe are similar to the UK, whilst more companies in China, Middle East and Central & Eastern Europe are experiencing critical liquidity situations. Overall recovery expectations for 2010 and 2011 are slightly more positive in the US and Middle East, with China's expectations for growth between 8% and 8.5%. Conclusion Klaus Kremers concluded that the findings of the UK survey indicated that to effectively respond to a crisis and reposition for future growth, UK companies needed to create higher liquidity reserves, optimise working capital and establish variable cost structures. Despite talk of recovery there was no room for complacency in the months ahead. Although companies had been decisive in cutting costs and trimming headcounts, it was unclear whether they had taken the brave and painful decisions necessary to structure their balance sheets and properly align their capacity levels for the post-crisis markets. About the Study The UK Restructuring Survey 2010 is based on interviews with a mix of board level decision makers and Financial Controllers at 52 of the UK’s largest firms across a wide range of industries (turnover in excess of £100 million). This research forms part of an annual global study by Roland Berger Strategy Consultants – the International Restructuring Survey 2010.
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