Bootle delivers bleakest economic assessment yet
ECONOMIC recovery is years off as the UK’s economy heads into deep recession, says Roger Bootle, economic adviser to business advisory firm Deloitte.
The well respected economist is warning that unemployment isn’t likely to peak until 2011 and that the economy will contract further next year.
In a pessimistic prognosis included in Deloitte’s latest assessment of the current state of the profitability of British business, Mr Bootle said that the number of people out of work could reach a record 3.5 million or 11% of the workforce.
“The credit crunch means that plunging profits could have even bigger repercussions in the rest of the economy than in the past,” he added.
“Many firms are now wholly reliant on retained earnings, as lenders have cut their credit lines or denied them access to borrowing. Accordingly, I expect corporate insolvencies to soar.”
He goes on to add that the second consecutive fall in profitability in the third quarter of last year underlines the adverse impact the recession is already having on company bottom lines.
“So far, the drop in profitability has been relatively modest. However, I expect this downturn to be significantly worse than the early 1990s recession, prompting profits ultimately to plummet by around a third,” Mr Bootle said.
However, on a more upbeat note the economist said that cost pressures were rapidly easing.
The further drop in the oil price to around $45 per barrel has seen energy, transport and distribution costs fall. Meanwhile, rising unemployment is bearing down on wage pressures, keeping labour costs down while rental growth is slowing sharply.
Even so, it is little consolation and even though falling interest rates and taxes will do some good, Mr Bootle predicts that by far the biggest determinant of the economic outlook is the willingness of banks to lend.
However, with a raft of recession related bad debts heading their way it looks as if the banks will focus on shrinking their loan books even further.
“What really matters for firms’ profits is revenue growth and revenues are set to fall as the economy falls deeper into recession. I think that the economy will contract by around 2.5% this year,” he said continuing his bleak assessment.
“I find it hard to see any part of the corporate sector emerging from this downturn unscathed.The nightmare scenario for firms must be that a period of deflation prompts consumers to delay their purchases in the hope of further price falls.
“If the recession pans out as I expect, with real GDP falling by around 4% from peak to trough, I think that profits will plunge by around a third. Needless to say, if recession starts to turn into depression, profits could fall further.”
