Merseyside advisers say there’s more bad news to come before the recovery. Alistair Houghton reports

WE MAY be seeing the first signs of recovery – but an actual recovery is, according to the region’s accountants and insolvency practitioners, still some way off.

Many, if not most, economic indicators seem to show that the pace of the downturn in the UK has slowed.

Yesterday, Halifax said house prices rose for the third month in a row during September, increasing by a further 1.6%.

Also yesterday Tesco, reporting its half-year results, said customers were “showing signs of greater optimism” even while the retail economy remained subdued.

But those positive figures were tempered by news of a surprise fall in manufacturing output (see panel on right), which showed just how delicate the UK economy remains.

In the medium term, insolvency practitioners insist that, in terms of job losses and company failures, things will get worse before they get better – a sign of what is known as a double-dip recession.

They say that many companies that have battled to survive the recession will struggle to cope when the economy picks up as they will simply not have the cash to expand their businesses.

Retailers could be particularly badly hit in the New Year if they do not meet their Christmas sales targets.

Last weekend, a survey from insolvency practitioners Begbies Traynor showed the number of retailers in financial distress has risen sharply in the last month, as conditions toughen on the high street. Its Red Flag early warning system said 125 retail companies encountered critical problems in September, up 37% from August.

The recovery and restructuring firm expects a significant number of the 125 to begin formal insolvency procedures within a year. It warned there could be as many retail casualties this Christmas as last year, when 15 major chains failed.

A survey by the insolvency practitioners’ trade association, R3, backs up that negative view.

Its members believe business failures in England and Wales will rise by 31% on 2008 figures, to about 29,000 for the year, while personal insolvencies will rise by a similar figure, to 139,000.

R3’s North West regional chairman, Matt Dunham, says he expects things to get worse once HM Revenue and Customs (HMRC), which has allowed some firms to defer tax payments, starts demanding its money.

He said: “As the market starts to come out of recession, people will start to spend.

“Businesses will find they’ve used their working capital to fund losses and they just won’t have the facility to grow out of recession.

“That will create a burning platform which will cause businesses to fail.”

But, on a more positive note, Mr Dunham says that company failures do not necessarily mean job losses. He says companies that do have finance will be able to snap up struggling firms – and their staff – in support of their own expansion plans.

He said: “The leaner businesses out there that have made cutbacks, liquidated certain assets or have reached agreement with their banks will be able to snap up some real bargains.”

The phrase “green shoots” was most famously used by then-Chancellor Norman Lamont in 1991, when he said “The green shoots of economic spring are appearing once again”. His optimism came too soon – Black Wednesday followed just months later – and Merseyside accountants say we should not get too excited about any apparent signs of recovery just yet.

Ian Goalen, senior partner at KPMG, in Liverpool, warns that the economic recovery will be a long haul and agrees that the number of insolvencies will increase.

He said: “The first quarter of 2010 is going to be a difficult first quarter for business.

“When people say there’s green shoots, I think that’s more sentiment than fact.”

He said: “During recessionary periods, businesses go into receivership but businesses that are surviving and finding it difficult generally manage their working capital well, by destocking or trying to chase debtors.

“When you come out of a recession, trading increases. People are replenishing stock levels because sales are going up, so the number of debtors you have goes up.

“Working capital management becomes critical.

“As we come out of recession, more companies are going into administration, receivership or liquidation because they don’t have the bank funding available.

“People think the banks are back lending again, but it’s in very specific circumstances and under very tight guidelines.

“I still believe some businesses are getting their re-funding, but it’s to fund a steady situation rather than an upturn in business. “

Mr Goalen also warns that any forthcoming public sector budget cuts will hit the private sector hard.

“Whichever Government comes in next will introduce public spending cuts,” he said.

“When that spending gets cut, it’s going to have quite an impact on the private sector.

“Anybody that’s connected to that public sector spending has been at the moment cushioned. That isn’t going to be the case, come March.”

Mr Goalen also warned of more New Year retail insolvencies.

He said: “Nobody is going to pull the plug on a retailer in the two months up to Christmas. If they’re going to pull the plug, it’ll be just after Christmas when rental leases are due if trading is not great.” Russell Cash, partner in the restructuring and recovery team at Baker Tilly in the North West, also struck a cautious note.

He said many companies were also pinning their hopes on the availability of enterprise guarantee funding. But he said that funding was only available to companies that could prove their viability, and said some firms would be disappointed if they tried to rely on it.

Mr Cash said retailers could be particularly vulnerable if their Christmas sales figures were not up to scratch.

“People are having to come out of denial mode,” he said.

“This is affecting a lot of different sectors. Construction and property, retail, and even private schooling – a lot of people cannot afford to pay those kinds of bills.

“More than ever before, it’ll be interesting to see what Christmas retail figures are like.”

Barry Flynn, senior partner at Ernst & Young, in Liverpool, suggests the economy will see a saucer shape, rather than a double dip, and says it may take some time before people feel there is a recovery.

He said: “There’s what’s happening in the economy, and there’s how it feels to people.

“The economy is going to look saucer-shaped, bouncing along the bottom for a while before coming out the other side.

“Companies are going to continue their redundancy programmes they have already planned.

“It may feel to people that it’s getting worse, even though trade or output figures are not getting worse.

But Mr Flynn said there were some very positive signs that economic improvement was on the way, including this week’s Chartered Institute of Purchasing and Supply report showing the services industry expanded at its fastest rate for two years in September.

Brian Clark, senior partner at PricewaterhouseCoopers, in Liverpool, says he is confident the worst of the recession is coming to an end.

A PWC poll in September showed 80% of private business owners in the north predicted that their business situation will improve or stay the same in the next 12 months, rather than declining.

Mr Clark says new PWC research also suggests that the European market for flotations and rights issues – particularly in London – is also showing signs of improvement.

Mr Clark said: “The way to test how things are going is to ask the clients. They’re at the coalface.

“My take is that we’re technically still in a recession, but there are indicators from the coalface that we’re over the worst.”

VAT RISE COULD HIT RETAILERS: PAGE 10

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