Abandon hope all ye who enter? Just what’s in store for 2009?

COME the end of December, a business journalist’s inbox is usually full of New Year predictions, wish lists, grumps, praises and grumbles.

But this year they are notable in their absence and it’s hardly surprising. The last quarter saw global economies take an uncomfortable tour around forgotten corners of economic hell; a one way ticket to bust with all trips to recovery apparently suspended indefinitely.

And the ride’s only going to get worse. Yippee.

Although Orwellian sandwich board wearers advertising apocalyptic doom are yet to take to the streets, the evidence that something bad is going to happen is undeniable. The number of companies going into administration is growing daily,

Sterling is continuing to lose value and clout, business failures are mounting, and deflation has become the proverbial creeping menace. And the pain isn’t going to stop anytime soon. The credit crunch’s seemingly unstoppable shadow will continue to stretch across the world plunging us all into recessionary darkness (the metaphors will cease soon I promise before this article becomes too Tolkienesque).

Facing up to such harsh realities is no easy ask as David Wilson, joint regional managing partner for Begbies Traynor, explains.

“People don’t want to make predictions because they’re shell shocked,” he says.

“Everything has happened so quickly undermined by the failure of the banking system. 2009 will not see any resolution to that. I predict that the market will be very difficult for the next 18 months to two years.”

The situation according to Wilson is exacerbated by the existence of too many weak businesses.

“Normally boom-to-bust cycles average every eight to 10 years. We’ve had nearly 20 years of growth,” he says.

“You bought a business or set one up and you knew it was going to be an instant success. Now those weaker businesses are beginning to fail as they deserve to but because credit has been so easily accessible many don’t have any assets. They don’t own anything.”

And there are other deal breakers not least employee liability, which according to Wilson is putting pay to acquisitions and buyouts at the eleventh hour.

“I had a deal fall apart on me at the last minute because the buyer didn’t want to take on the risk. Often the employee liability exceeds the company’s value. It’s not so much a problem for large corporate but for small to medium sized firms particularly in the manufacturing sector where staff often have long service it’s an issue.”

Roger Esler, corporate finance partner at Deloitte in Leeds, is equally blunt in his analysis. He also believes that the UK hasn’t seen the full impact of the consumer slowdown on corporate earnings and that Christmas has disguised a highly cautionary environment in both consumer and commercial sectors. Stock markets will continue to fall with recovery to Q1 levels in the second half and analysts’ current forecasts will prove to be optimistic despite factoring in deterioration of trading performance, he says.

Deal volumes will be much lower although good businesses will generally find buyers but for a fair not inflated purchase price. Firms struggling to service borrowings will be under increased pressure to sell. On the flip side, purchasers with access to finance will be able to unearth some bargains.

“The first two quarters of 2009 will give a better steer as to depth and duration of the downturn,” he adds.

“The trading news won’t be pretty and December and March year ends will bring a sharp rise in profit warnings. We might see the bottom in late 2009 but the upturn might be less evident until 2010.”

Esler goes on to warn that strong management and leadership won’t necessarily secure survival and that firms with the strongest balance sheets could emerge as recession winners. He also predicts a growing number of predatory and hostile trade bids for public firms, many from overseas where exchange rates favour them.

“There’s a risk that we will lose some of our local plcs at low valuations where they have not prepared themselves for this risk with a robust defence strategy. This should be on every boardroom agenda.”

Others are more cautiously optimistic however, believing that things will improve as business acclimatises itself to the new economic climate. According to David Buckley, Yorkshire’s head of corporate finance at accountants Ernst & Young explains, there are deals to be had (so long as you’ve got cash).

Buckley predicts that 2009 will be a year of adjustment with new deal structures, more realistic valuations and the resurgence of sovereign wealth funds. It will also see the strong get stronger and the weak getting weaker.

“Companies that are performing well and have ‘cash in hand’ can take advantage of current market conditions to scoop up strategic assets. Deals will be done by companies with solid capital positions,” he continues.

“But cash-rich companies are in the minority at the moment and liquidity remains tight. Credit will be reserved for existing customers with only the very strongest of credit profiles. Corporates seeking to refinance or raise debt must ensure their business and financial strategy has absolute clarity.”

Sovereign wealth funds (SWF) may have been burned by their investments in the banking sector this year, but Buckley believes they will make a comeback and help facilitate deals in the New Year.

“SWFs now manage some $4 trillion of assets globally. They are expected to pump money into private equity firms so that they can use the cash to buy restructuring and distressed assets, taking advantage of the opportunities the next 12 months will bring.”

Mark Spinner, head of private equity at international law firm Eversheds, agrees with Buckley’s analysis.

“Stressed and distressed retailers will continue to drive consolidation in the mid-market retail sector with financial services consolidation continuing in the upper-market within jurisdictions heavily exposed to the credit crunch.

“The energy efficiency sector will continue to be attractive to both private equity and corporate investors, while oil and gas transactions are likely to decline considerably if oil prices remain at the current reduced level.”

But it isn’t just cash that’s the smart money. The banks may have closed their purses but the Government has opened its coffers like no other time in recent history. And according to Gary Lumby, president of Leeds Chamber of Commerce, the financial lifeline will help Yorkshire businesses drive the region out of recession.

“For 2009 our objective should be to put the region, and its businesses, in a position where we exit the recession stronger,” he rallies.

“As a result it will be imperative, in the New Year, that the region and its businesses take full advantage of the initiatives the Government has put in place to aid the economy, as it will be business that drives the economy out of this downturn.”

Other factors such as the opening of the East Leeds Link road, which will provide direct access to the Aire Valley, redevelopment of Leeds Bradford Airport, the strength of the city’s academic institutions, and its reputation as a retail destination (due to be built on with the development of the Trinity Quarter and plans for Eastgate) will help fight the economic malaise according to Lumby. 

“This diverse community, which has thus far weathered the storm, will need to look at 2009 as an opportunity, rather than a threat,” he adds.

But his inspirational call to action does feature a whisper of gloom.

“I do want to stress that although there are, and will be, opportunities available to guide us through the recession, the year will be tough for the local business community,” he warns.

“Some of our key sectors, such as finance and professional services, will experience difficult trading conditions and the Chambers own findings show that unemployment could rise to more than three million in 2009.”

However, as recent months have proved anything can happen and for many all bets are off for 2009. But before we all go out and blow the last of our hard earned cash on crystal balls and tarot cards there is one certainty – things will eventually get better. Whether lessons have been learned is another matter.